Banks Squabble With EU Over Greek Debt Losses

By Aaron Kirchfeld - Oct 24, 2011

The world’s biggest banks are squabbling with European leaders over the size of losses on their Greek bonds as they seek a deal to cut the country’s debt load, two people with knowledge of the discussions said.

The financial companies, represented by the Institute of International Finance, proposed a loss of 40 percent on Greek debt, said one of the people, who declined to be identified because talks are confidential. The European Union is calling on investors to forfeit as much as 60 percent, making a compromise at 50 percent possible, the person said.

The talks are part of an attempt to solve the two-year-old sovereign-debt crisis that has pushed Greece closer to default, roiled global markets and dented confidence in the survival of the 17-nation currency. EU leaders are scrambling to reach an agreement on bolstering the region’s rescue fund, recapitalizing banks and relieving Greece to avoid contagion spreading to Italy and Spain before another summit in two days.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said talks on private-sector involvement in a second aid package for Greece are focusing on losses of “about 50 percent, 60 percent.”

Charles Dallara, managing director of the IIF, the lobby group for 450 of the world’s biggest financial companies, said on Oct. 22 that “discussions are making progress, albeit limited.” The group remains “open to explore options on a voluntary approach built on a realistic outlook for the Greek economy and restoration of Greece’s market access,” he said.

Larger Writedowns

EU policy makers have been calling for larger writedowns amid a deteriorating Greek economic and financial situation, as highlighted in a draft report last week by the European Commission, the European Central Bank and the International Monetary Fund, collectively known as the troika.

Greek two-year notes currently trade at about 40 percent of face value. Under the terms of a July 21 accord with the IIF, the banks would take losses of 21 percent on the net present value of their holdings of the nation’s debt. That plan includes up to 35 billion euros ($49 billion) in high-quality collateral for the investors.

One option being considered involves a swap with no collateral of any kind in a so-called hard restructuring, people familiar with the matter said on Oct. 21. Other plans involve an exchange with a 50 percent reduction in net present value, or upfront bond exchanges into either European Financial Stability Facility bonds or new 30-year Greek government debt, the people said. Upfront exchanges could involve a 50 percent discount off face value.

To help European lenders shoulder sovereign losses, lenders may be required to raise about 100 billion euros in capital by mid-2012, according to two people briefed on the matter. The European Banking Authority tested lenders to see how much money they’ll need after writing down bonds from countries such as Greece and marking up stronger debt including that of Germany, they said.

Reuters reported the 40 percent proposal by banks late yesterday.


Still waiting for a European solution

The BNN Chase by Marty Cej:

European leaders have adjourned to Wednesday, taking fresh proposals from the weekend’s summit back to their respective parliaments where dismay and disappointment will be expressed in a multitude of languages. Formal plans should be drawn up by Tuesday and announced at the completion of another summit Wednesday.

There will be three main pillars to the plan: A haircut for holders of Greek debt that is likely to become more of a buzz cut; larger European bank recapitalizations, and some kind of external support for the EFSF bailout mechanism that assures markets that those in greatest need of bailouts or backstops – Greece now, Italy soon – will get what they need when they need it. The next three days ought to see plenty of leaks to the media as governments try to lessen the shock to markets and voters of coming to an actual decision.

The solution will be televised.
In the meantime, central bankers elsewhere continue to wrestle with the impact of the European debt crisis on their own economies. Federal Reserve Bank of Dallas President Richard Fisher was one of three Fed members to dissent from Open Market Committee decisions in August and September to lower borrowing costs and stimulate the U.S. economy through “unconventional” means. Fisher doesn’t like “Operation Twist” – the Fed’s plan to sell shorter-term bonds and buy longer-term bonds in a bid to push yields at the long end lower – and he doesn’t care who knows it. Fisher sits down with us at 1:00 pm on Headline.

Our conversation with Fisher comes less than 24 hours before Bank of Canada Governor Mark Carney must explain to markets why interest rates won’t be raised anytime soon even as inflation accelerates beyond the central bank’s preferred target pace.

Canada’s benchmark rate is expected to remain unchanged and the accompanying statement is expected to be explicit in its assessment of the threats to the Canadian economy from the European debt crisis and U.S. unemployment. A survey released today by the National Association for Business Economics shows U.S. companies’ hiring plans at their worst level since January 2010.


Caterpillar doesn’t seem to be feeling the pinch, though. A few minutes ago, the world’s biggest maker of heavy yellow earth-moving equipment, reported higher-than-expected third-quarter earnings, record revenue and thousands of new jobs. The company said it expects year-end profit at the high end of its previously announced range and “2012 is shaping up to be better.” The quarterly earnings report from Caterpillar is always full of economic analysis and detail from around the world and this one is no different. Paul Bagnell has the file.

As I was typing that last bullet point, three deals were announced: Healthcare provider Cigna agreed to buy Healthspring for $3.8 billion; Oracle agreed to buy cloud computing company RightNow Technologies for $1.5 billion and J.M. Smucker agreed to buy a majority stake in Sara Lee’s coffee business for $350 million up front and another $50 million over the next 10 years.
Back to earnings, we’ll be taking a look at numbers from Netflix, Texas Instruments and West Fraser Timber.

This week sees Canadian earnings season pick up with numbers beginning tomorrow from CP, CNR and Astral Media. Wednesday will be busy with Rogers Communications, Corus, Agnico-Eagle, Mullen Group, Methanex, Goldcorp, Sherritt, Lundin Mining and Open Text.

Ivan Lo Equedia Weekly Says...

The high risk, high reward profile in Canada is dominated by companies listed in the TSX Venture exchange - in particular, the junior mining sector with its higher-risk, less liquid, and more speculative member companies.

Under the current global economic and political environment, there will undoubtedly be periods of volatility leading to downside pressures.

While the first few months of 2011 were strong, the performance of the TSX Venture has been under extreme pressure since early March. It has been severely battered as risk aversion has strangled the equity markets. When flight to safety is the number one priority, the Venture is always going to get hit the hardest. In a market where liquidity has always been a concern, things can go real bad when money is pulled out.

But does that mean you should stay away?

Gauging the TSX Venture

Generally, the gauge for investor sentiment is the strength of an exchanges' daily trading volumes; in other words, liquidity. In the case of the junior mining sector, the strength of the TSX Venture volumes have been dwindling at an extreme pace.

In January 2011, the S&P/TSX Venture set a new record for daily-traded volumes - reaching a yearly and all-time high of over 600 million shares traded per day. Since then, volume has tumbled averaging below 200 million shares per day in the last few months. I consider this number to be the absolute minimum level of liquidity support for the TSX Venture. If the average traded volumes continue to dip below this number, we are going to see some rock bottom prices soon.

To get a better grasp of what's going on, let's look back at the Venture's history.

Predicting the Future by Looking at the Past

Over the last 10 years - but excluding the 2008 crash - typical corrections on the TSX Venture have ranged from 17-31%, with the longest correction lasting over a 19-week period. Based on rolling 52-week highs and lows, the Venture has seen a decline of 47% from March 7, 2011 to October 4, 2011 - a range of 28 weeks. This clearly shows us that this is not a typical correction.

The TSX Venture in its current state is now back to levels not seen for 8 years, when gold was trading just over $400/oz and the TSX Venture exchange was barely nearing its second anniversary.

To put the crash of 2008 into perspective, let's look at the previous bear runs of other junior exchanges in Canada, including the Vancouver Stock Exchange (VSE), the Canadian Venture Exchange (CDNX), and the TSX-Venture (TSX-V) since 1983.

The Venture's 80% drop in 2008 is the single largest decline ever in the 25 year history of any of the past Canadian junior exchanges. The biggest drop in the junior exchanges aside from 2008 was during the crash of 1987 when the junior market in Canada dropped 54% over a one-year period. So far this year, we have declined 47% over a 7-month period.

What's Next?

In 1987, the market was under pressure for nearly four years before a new upward trend was established. In 1996, following the Bre-X scandal, the market was under pressure for three and a half years. Luckily, in most other cycles of corrections, the markets recovered in just over one year.

Regardless, those numbers can be daunting. However, there is a bright side.

While additional market pressures are still on the table and Europe remains a mystery, there is a strong possibility that we could have a recovery in the junior sector despite the negative sentiment.

First of all, current low interest rates offer very few alternatives for deployment of capital. Just last week, I talked about how badly the world's largest bond fund has performed in this low interest rate environment (see Prepare for Upside).

Second, metal prices remain significantly above average historical prices. That means many mineral projects can be developed into high margin operations. As such, many of the juniors remain well funded, opening the potential for exploration spending to create speculative interest in new discoveries.

Third, balance sheets of the majors continue to strengthen and that means more potential for M&A activity, including takeovers of exploration and development companies. We have already seen it over this past year including last week's takeover announcement of Hathor by Rio Tinto - just one of many takeovers and consolidation attempts this year. I fully expect this trend to continue - especially given the current major decline in share prices for many of the juniors.

Last, but certainly not least, exploration capital continues to flow - unlike the climate in 2008 when a junior explorer couldn't even raise a few pennies to put something into production.

Big Money

Last month, Metals Economics Group indicated that 2011 non-ferrous exploration budgets would exceed US$17 billion on expenditures related to precious and base metals, diamonds, uranium, and some industrial minerals; the focus of these expenditures on gold exploration with copper being second. According to MEG, this represents an increase of about 50% from the 2010 - setting a new all-time high. That means there is a lot of smart money being risked.

Record levels of exploration spending should drive new discoveries and strong reserve/resource growth over the next year, which should improve the equity valuations in the junior sector. This, along with high metal prices, should lead to a rebound in mining equities in the coming months if the overall equities market turns around.

Room for Growth

Last week, we saw PMI Gold jump from a low of $0.56 cents to a high of $1.30 in two days following the announcement of more than tripling their current gold resource at Obotan.

For those who don't recognize the name, PMI Gold's Obotan project lies approximately 8 km southwest of Abzu Gold's Mpatasie-Golden Reef concessions in Ghana.



Abzu is a company we featured earlier this year (see report here.) Like many other junior explorers, it too has taken a hit.

However, just last week they announced the discovery of a new mineralized zone on its 100% owned Asafo concession located along the eastern margin of the Kibi Belt, Ghana. The new discovery is centered on a drill hole that returned 4.72 g/t gold over 20.00 metres at a vertical depth of only 28 metres. (see news release)

The great thing about gold exploration in Ghana is the simple geology associated with gold bearing zones. Drilling by Keegan Resources and PMI Gold have clearly shown us that it doesn't take much to add ounces. Those are just some of the reasons why Keegan and PMI have attracted so much interest with their African gold projects. And that's what I am banking on with Abzu.

Over the next month, I anticipate Abzu to release drill results on their most advanced target, the Nangodi concessions where previous explorers have identified numerous targets, where prior drilling intercepted (see picture below):

52m @ 3.24g/t Au (NGRC009)
26m @ 2.24 g/t Au (NGRC017)
51m @ 2.4 g/t Au (NGRC018)
13m @ 2.48g/t Au (NGRC019)*.

*(based on incomplete, unpublished historic data provided by Red Back. This information is historic in nature and is not 43-101 compliant. A Qualified Person has not reviewed drilling or sampling procedures or QA/QC undertaken at the time of drilling. However, Abzu has no reason to doubt the validity of the information).

These targets are near the Burkina Faso border (well-known for its resource rich properties) and are approximately 30 km southwest of and along strike from the Youga Mine where Endeavour Mining Corporation anticipates gold production of approximately 84,000 ounces this year.

There is no reason to doubt the validity of the information from the past drill results. As such, I anticipate the upcoming drill results by Abzu on their Nangondi to be similar to the historic results provided by the original owners. If the results come back similar, Abzu should garner some serious interest.

On many of Abzu's properties, there is gold at surface, the geology is simple, and there are countless artisanal miners on Abzu's properties - all great attributes.

All of the targeted vein systems being tested by Abzu are anticipated to be analogous to those discovered by Keegan Resources at their Esaase deposit, just northeast of Abzu and PMI Gold's Obotan Project to the southwest.

Interest on projects within the Ghana area have garnered strong speculative capital by both the institutions and retail investors. As Abzu continues to drill, I strongly believe their numbers will speak for themselves.

What to Expect

For the rest of 2011, I will be adding my exposure to juniors that are associated with strong management and that have active exploration and development programs on top-quality targets/assets over the next 6-12 months.

Risk tolerance will continue to be a major factor in determining the junior mining sector market valuations. That means we should be aware of the potential macroeconomic factors (Europe, politics, China etc.) that help to shape broad investor risk tolerance.

That being said, I still believe that strong overall fundamentals (metal prices, low interest rate) underline the junior mining sector. If you have an iron-clad stomach, accumulating positions during corrective market phases could prove very rewarding.

Many of the stocks listed on the Venture have lost bid support. In cases and scenarios such as this, strong companies have been hit based purely on liquidity of the markets, as opposed to the business itself. When people pull their bids, stocks can drop really fast - but that also means that stocks can bounce back just as fast.

Patience.



Until next week,

Ivan Lo
Equedia Weekly

Pescod says...

To the left is the front-page of the recent issue of “The
Economist—Nowhere to Hide...Investing during a time of
crisis” and you know what it’s all about.

Their feature topic is about where does an average
investor anywhere in the world these days get a return.
Bonds in most countries are offering next to nothing.
Treasuries in the United States yield less than the rate of
inflation and one is assuming of course that the Ameri-
can get their act together and are able to pay you back.

The markets have been terrible over the last decade as
a whole with two huge scares in the last three years and
while commodities did offer a couple of years of fun, if
you didn’t take your profits six months ago, it’s gone.
And then some.

Many oil and gas stocks, some of which we liked are
now offering two, three or four-for-one sales and the
question is, where do you hide?

The Economist answers, “Nowhere to hide (before and
afterwards)”. They lead into their front-page article,
“Investors have had a dreadful time in the recent past.
The immediate future looks pretty rotten, too.”
In the article, the Economist writes, “PITY the world’s
savers. Economists and other busybodies chide them for
not spending more, thereby stimulating the economy.
Meanwhile their pension schemes are steadily being
made less generous, a process that will require them to
save more, not less, if they want to enjoy a comfortable
retirement. Britons now retiring on private pensions will
receive an income 30% less than those who left work
three years ago. When savers try to find a home for their
money, they face daily headlines about bank bailouts,
sovereign-debt crises and the possibility of another re-
cession. Given the scale of the risks, investors are not
being offered much in the way of reward.”

Looking forward...they are a little bit nervous, but they
write, “Polish up our crystal ball: Investors’ choices will
be guided by how they think the crisis will unfold. The
best hope is that the authorities will “muddle through”:
stabilize the European sovereign-debt crisis, steer devel-
oped economies back on to a path of 2-3% annual growth
while simultaneously devising realistic plans to reduce
government debt over the medium term. But if that rosy
prospect does not materialize—and the odds are against
it—the world is looking at three scenarios.”

The Economist suggests that one possibility is that
governments will try to inflate its debt away, possibly
with larger doses of easing, basically printing money,
which is usually good for gold.

A second possibility would be a very big disaster in
that European authorities make bad mistakes regarding
Greece and things get out of control.

Pie-V

Some things seem to take a long time to happen...but
now it has happened and it has happened with pizzazz,
albeit into an ugly market.

Primary Petroleum has finally announced a deal with
their large lands in the Bakken Fairway on northwestern
Montana.

They announced, “Primary Petroleum is
pleased to announce that its wholly owned U.S. subsidi-
ary; Primary Petroleum Company LLC, has signed and
closed a Sale and Joint Venture Agreement with a major
U.S. based industry partner that will pay $48.5 million to
acquire a 32.5% working interest in Primary’s 291,000 net
acres in Western Montana.”

Basically, the un-named company has agreed to pay
$7.5 million in cash to Primary plus $41 million for joint
exploration program including shooting 3-D seismic and
six or seven vertical and six or seven horizontal wells. If
they like what they see after the next years work, the un-
named major can acquire an additional 17.5% working
interest in the play for another $41 million. Wow! This
sound like real money.

The talk is that the un-named major oil company in-
volved (we believe) is Occidental Petroleum and OXY has
already acquired big chunks of land in the Bakken area
and is a big player with nine rigs currently drilling ac-
cording to the latest report on the Bakken and Three
Forks, by RBC Capital Markets.

That report takes a look at the economics of Bakken
and suddenly you realize at $80 oil, good operators can
still make a ton of dough. What makes this all timely is
that Statoil this week, bought out Brigham Exploration
for about $4.5 billion in cash, getting the big Norwegian
producer an entrée into the Bakken (Statoil is having
trouble as its North Sea production has dropped dramati-
cally).

By making that purchase, Statoil will join the biggies
such as ConocoPhillips and Exxon Mobil and Occidental
Petroleum for their big land holdings in the area.

This is almost the ‘Good Housekeeping’ seal of ap-
proval to see all this happen, although one has to re-
member that they have a huge chunk of land and it is in
the right area, but they have yet to drill a well into it and
have results.

Pescod States...

HATHOR EXPLORATION
FISSION ENERGY
BELO SUN MINING

(T-HAT)
(V-FIS)
(V-BSX)

$4.40 +0.37
$0.75 +0.13
$1.16 -0.01

Silly us for taking some easy money in an ugly market. We
had been talking about Hathor Exploration for months because
Eric Zaunscherb, analyst now with Pacific International
thought sooner or later they became a take-over target...and
he was right!

One only wondered what the bidding war would have
started at had it happened in better markets, or before Fuku-
shima.

Zaunscherb had been suggesting for people to hang on,
but again, silly us, there is nothing like taking nice profits in a
bad market.

Today, Rio Tinto enters the bidding war and Zaunscherb
writes in a published report to his followers, “Mega-miner Rio
Tinto and Hathor have announced a friendly agreement for
Rio Tinto to acquire all of the common shares of Hathor for
$4.15 in cash, or approximately $578 million on a fully-diluted
basis.”

He notes, “Directors and senior management have signed
a support agreement locking up their shares (approximately
4.6%, fully diluted) subject to a reasonable break fee of $20
million; their support agreement may be terminated in favor
of an unsolicited superior bid.”

Zaunscherb adds, “This is not capitulation on the part of
Hathor. We expect Cameco to come back with a minimum
10% raise to Rio Tinto’s offer to approximately $4.50 per
share. Further, we surmise that Rio Tinto is seriously inter-
ested in this world-class asset, having acquired a 5.7% inter-
est in Hathor (fully diluted basis), and we expect the senior to
counter with a further 10% lift to approximately $5.00 per
share.”

Zaunscherb continues, “It would not be surprising to see a
third party (i.e. not Cameco or Rio Tinto) enter into the bid-
ding war for this world-class uranium asset.”
Once upon a time it looked like it might be had in an ugly
market for a couple of nickels more, now looks like it’s going
to be attracting a lot more attention than one had expected.
Zaunscherb is one of the few analysts out there that has
made anybody any money, what with the Hathor take-over
and a huge performance of his former favorite gold stock—
Avion Gold (AVR). So needless to say, today we ask him
again if you wanted to buy only one stock in the market to-
day, what would it be?

He answers Belo Sun Mining for their gold play in Brazil which should have some new resource numbers in the com-
ing months and he expects a big increase.

As far as the poor performance in gold of late? He suggests he expects the American dollar to start trending down
again sooner or later and suggests that gold is still in an uptrend which he expects to continue.

GRAYD RESOURCES
AGNICO-EAGLE

To take the easy money and run...or to wait around for
a better offer? We’ve just talked about the Hathor take-
over and how those who have hung on are probably go-
ing to benefit from the developing bidding war that is
finally taking place. Obviously, it was better to hang on.
But then, there are other stories. Take a look at
what’s happening to Agnico-Eagle Mines today as their
Goldex mine in Quebec is watered out and there is some
debate as to whether that mine will ever be producing
again. If it is, for sure it’s a long way down the road...a
long, long way.

Agnico-Eagle which owns many mines, still gets
drubbed today. This affects Grayd Resources and Agnico-
Eagle had an offer in to buy out Grayd many weeks ago,
but the offer was $2.80 cash or a combination of cash
and shares of Agnico-Eagle.

All of a sudden, that paper offer isn’t looking nearly as
good and Grayd shares are getting clobbered. All of a
sudden, that $2.80 price on Grayd of a few weeks ago is
looking awfully tasty and the answer is, one never knows
what happens on these bidding situations.
Congratulations to those who hung on in the Hathor
deal, but punishment for those who were hoping for
something better on Grayd Resources.

(V-GYD)
(T-AEM)

$2.30 -0.19
$47.35 -10.62