The “Bloodbath” in Canada Is Far From Over

By Justin Spittler

The oil price crash continues to claim victims…and many of them are in Canada.The price of oil hovered around $100 for most of last summer. Today, it’s trading for less than $45. Weak oil prices have pummeled huge oil companies. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks the performance of major U.S. oil producers, has declined 36% over the past year. The Market Vectors Oil Services ETF (OIH), which tracks U.S. oil services companies, has declined 30% since last November. Weak oil prices have even pushed entire countries to the brink. Saudi Arabia, which produces more oil than any country in the world, is on track to post its first budget deficit since 2009 this year. If oil prices stay low, the country could burn through its massive $650 million pile of foreign reserves within five years.

Oil’s collapse is also creating big problems for Canada’s economy.....

Canada is the world’s sixth largest oil producer. Oil makes up 25% of its exports. Last month, The Conference Board of Canada said it expects sales for Canada’s energy sector to fall 22% this year. It also expects the industry to record a net loss of about C$2.1 billion ($1.6 billion) in 2015. That’s a drastic change from last year, when the industry booked a C$6 billion ($4.5 billion) profit.

Major oil firms are slashing spending to cope with low prices. Last month, oil giant Royal Dutch Shell plc (RDS.A) said it would stop construction on an 80,000 barrels per day (bpd) project in western Canada. The company had already abandoned another 200,000 bpd project in northern Canada earlier this year. The Canadian Association of Petroleum Producers estimates that Canadian oil and gas companies have laid off 36,000 workers since last summer. Most of these layoffs happened in the province of Alberta.

For the past decade, Alberta was Canada’s fastest growing province.....

Its economy exploded, thanks to the booming market for Canadian tar sands. Tar sand is a gooey sand and oil mixture that melts down with heat from burning natural gas. More than half of Canada’s oil production comes from tar sands. In Alberta, they account for 75% of oil production.

Tar sand is generally more expensive to produce than conventional crude oil. Canadian tar sand projects made sense when oil hovered around $100. But many of these projects can’t make money when oil trades for $45/barrel. Last year, Scotiabank (BNS) said the average breakeven point for new Canadian oil sand projects was around $65/barrel. This is why giant oil companies are walking away from projects they’ve spent years and billions of dollars developing.

All these cancelled oil projects are making Alberta’s economy unravel.....

Alberta lost 63,500 jobs from the start of year through August. It hasn’t lost that many jobs during the first eight months of the year since the Great Recession. The decline in oil production is also draining government resources. Last month, Reuters reported that Alberta was on track to post a $4.6 billion budget deficit this year. Economists say it could be another five years before Alberta runs a budget surplus. The crisis isn’t confined to the oil patches either.

A real estate crisis is unfolding in Calgary.....

Calgary is home to 1.2 million people. It’s the largest city in Alberta and the third largest in Canada. On Tuesday, Bloomberg Business reported that Calgary’s property market is starting to crack:

Vacancy is already at a five-year high in Calgary and rents are the lowest since 2006 after thousands of office jobs were cut. In downtown Calgary, the vacancy rate jumped to 14 percent in the third quarter, the highest since 2010 and compared with 5 percent for downtown Toronto, according to CBRE Group Inc. .... That doesn’t include as much as 2 million square feet of so-called "shadow vacancy" or space leased but sitting empty, which would push vacancy to 16 percent, the most since the mid-1980s.

Demand for office space is falling because of massive layoffs in the oil industry. That’s because oil companies didn’t just lay off roughnecks. They also laid off oil traders and middle managers, which means they need a lot less office space. According to Bloomberg Business, a principal at one Calgary real estate office called the situation “a bloodbath” and said “we’re at the highest point of fear and uncertainty now.”

Casey readers know the time to buy is when there’s blood in the streets.....

But it looks like Calgary’s property crisis is just getting started. Bloomberg Business reports that the city has five new office towers in the works. These projects will add about 3.8 million square feet to Calgary’s office market over the next three years. More office space will only put more pressure on rents and occupancy rates. Real estate developers likely planned these projects because they thought Canada’s oil boom would last. It’s that same thinking that made oil companies invest billions of dollars in projects that can’t make money when oil trades for less than $100/barrel.

Doug Casey saw this coming.....

In September, Doug went to Alberta to assess the damage first-hand. E.B. Tucker, editor of The Casey Report, joined Doug on the trip. Doug and E.B. spoke with the locals. They even tried to buy a Ferrari. They shared their experience in the October issue of The Casey Report.

E.B. went on record saying Canada was in for “a major wakeup call.” He still thinks that’s the case. In fact, he thinks the situation is going to get a lot worse.

When we were in Alberta, we heard over and over again "It'll come right back...it always does." It's not coming back. I expect the situation to get worse. And I see the Canadian dollar going much lower.

When that happens, E.B. thinks Canada’s central bank might do something it’s never done before:

Vacancy rates are rising in Canada’s heartland cities. Jobs in Alberta are disappearing. Unemployment is climbing. And there’s still a global oversupply in oil. None of this bodes well for Canada’s economy. Canada’s economy is in a midair stall. The locals certainly didn’t grasp this when we visited Alberta last month. That's usually the case when things are going from bad to a lot worse. If you’re a central banker in Canada looking at the data, there’s only one decision: print.

E.B. says Canada’s central bank will launch its own quantitative easing (QE) program.....

QE is when a central bank creates money and pumps it into the financial system. It’s basically another term for money printing. Since 2008, the Fed has used QE to inject $3.5 trillion into the U.S. financial system. If the Fed’s experience with QE is any indication, money printing wouldn’t help Canada’s “real” economy much. But it would inflate asset prices. That, in turn, would only make Canada’s economy even more fragile. E.B. is confident the situation in Canada will get worse. And he can’t wait to go back to Canada to collect on bets he made during his last visit:

Doug and I made a lot of side bets with business owners during our visit. One of them promised to sell us a Ferrari if things got worse...that's how sure he was that we were wrong. Looks like we'll be headed back to collect on that one.

You can read all about Doug and E.B.’s visit to Alberta by signing up for a risk free trial of The Casey Report. You’ll even discover how to make money off the oil industry, despite the collapse in the price of oil. Click here to learn more.

The article The “Bloodbath” in Canada Is Far From Over was originally published at caseyresearch.com.

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Crude Oil, Divorce, and Bear Markets

By Tony Sagami

Everybody loves a parade. I sure did when I was a child, but I’m paying attention to a very different type of parade today. The parade that I’m talking about is the long, long parade of businesses in the oil industry that are cutting jobs, laying off staff, and digging deep into economic survival mode. The list of companies chopping staff is long, but two more major players in the oil industry joined the parade last week.

Pink Slip #1: Houston-based Dresser-Rand isn’t a household name, but it is a very important part of the energy food chain. Dresser-Rand makes diesel engines and gas turbines that are used to drill for oil.
Dresser-Rand announced that it's laying off 8% of its 8,100 global workers. Many Wall Street experts were quick to point the blame at German industrial giant Siemens, which is in the process of buying Dresser-Rand for $7.6 billion.

Fat chance! Dresser-Rand was crystal clear that the cutbacks are in response to oil market conditions and not because of the merger with Siemens. The reason Dresser-Rand cited for the workforce reduction was not only lower oil prices but also the strength of the US dollar.

If you’re a regular reader of this column, you know that I believe the strengthening US dollar is the most important economic (and profit-killing) trend of 2015.

Pink Slip #2: Oil exploration company Apache Corporation reported its Q4 results last week, and they were awful. Apache lost a whopping $4.8 billion in the last 90 days of 2014.

No matter how you cut it, losing $4.8 billion in just three months is a monumental feat.

Of course, the “dramatic and almost unprecedented” drop in oil prices was responsible for the gigantic loss, but what really matters is the outlook going forward.

CEO John Christmann, to his credit, is taking tough steps to stem the financial bleeding, and that means:

• Shutting down 70% of the company's drilling rigs.

• Slashing it's 2015 capital budget to between $3.6 and $5.0 billion, down from $8.5 billion in 2014.

Those aren’t the actions of an industry insider who expects things to get better anytime soon.

I don’t mean to bag on Dresser-Rand and Apache, because they’re far from alone. Schlumberger, Baker Hughes, Halliburton, Weatherford International, and ConocoPhillips have also announced major layoffs. And don’t make the mistake of thinking that the only people getting laid off are blue-collar roughnecks. These layoffs affect everyone from secretaries to roughnecks to IT professionals.

In fact, according to staffing expert Swift Worldwide Resources, the number of energy jobs lost this year has climbed to well above 100,000 around the world.

From Global to Local

Sometimes it helps to put a local, personal perspective to the big-picture national news.

In my home state of northwest Montana, a huge number of men moved to North Dakota to work in the Bakken gas fields. Montana is a big state; it takes about 14 hours to drive from my corner of northwest Montana to the North Dakota oil fields, so that means those gas workers don’t make it back to their western Montana homes for months.

Moreover, the work was six, sometimes seven days a week and 12 hours a day, so once there, they couldn’t drive back home even if they wanted to. This meant long absences… and a good friend of mine who is a marriage counselor told me that the local divorce rate was spiking because of them.

Now the northwest Montana workers are returning home because the once-lucrative oil/gas jobs are disappearing. That news won’t make the New York Times, but it’s as real as it gets on Main Street USA.

From Local to National

Of course, the oil industry's woes aren’t a carefully guarded Wall Street secret. However, I do think that Wall Street—and perhaps even you—are underestimating the impact that low oil prices are going to have on economic growth and GDP numbers going forward.

Let me explain.

Industrial production for the month of January, which measures the output of US manufacturers, miners, and utilities, came in at a “seasonally adjusted" 0.2%.

A 0.2% gain isn’t much to shout about, but the real key was the impact the mining component (which includes oil/gas producers) had on the industrial-production calculation.

The mining industry is the second-largest component of industrial production, and its output fell by 1.0% in January. It was the biggest drag on the overall index.

However, the Federal Reserve Bank said, “The decline [was] more than accounted for by a substantial drop in the index for oil and gas well drilling and related support activities.”

How much did it account for? The oil and gas component fell by 10.0% in January.

Yup, a double-digit drop in output in just one month. Moreover, it was the fourth monthly decline in a row.
Last week’s weak GDP caught Wall Street off guard, but there are a lot more GDP disappointments to come as the energy industry layoffs percolate through the economy. Here’s how my Rational Bear readers are getting ready for GDP and corporate-earnings disappointments that are sure to rattle the markets.
Can your portfolio, as currently composed, handle a slowing economy and falling corporate profits? For most investors, the answer is “no.” Click above to find out how to protect yourself.



Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

The article Connecting the Dots: Oil, Divorce, and Bear Markets was originally published at mauldineconomics.com.

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What 10 Baggers (and 100 Baggers) Look Like

By Jeff Clark, Senior Precious Metals Analyst

Now that it appears clear the bottom is in for gold, it’s time to stop fretting about how low prices will drop and how long the correction will last—and start looking at how high they’ll go and when they’ll get there. When viewing the gold market from a historical perspective, one thing that’s clear is that the junior mining stocks tend to fluctuate between extreme boom and bust cycles. As a group, they’ll double in price, then crash by 75%..... then double or triple or even quadruple again, only to crash 90%. Boom, bust, repeat.

Given that we just completed a major bust cycle—and not just any bust cycle, but one of the harshest on record, according to many veteran insiders—the setup for a major rally in gold stocks is right in front of us.

This may sound sensationalistic, but based on past historical patterns and where we think gold prices are headed, the odds are high that, on average, gold producers will trade in the $200 per share range before the next cycle is over. With most of them currently trading between $20 and $40, the returns could be stupendous. And the percentage returns of the typical junior will be greater by an order of magnitude, providing life changing gains to smart investors.

What you’re about to see are historical returns of both producers and juniors during three separate boom cycles. These are factual returns; they are not hypothetical. And if you accept the fact that this market moves in cycles, you know it’s about to happen again.

Gold had a spectacular climb in 1979-1980, and gold stocks in general gave a staggering performance at that time—many of them becoming 10-baggers (1,000% gains and more). While this is a well known fact, few researchers have bothered to identify exact returns from specific companies during this era.

Digging up hard data from before the mid-1980s, especially for the junior explorers, is difficult because the information wasn’t computerized at the time. So I sent my nephew Grant to the library to view the Wall Street Journal on microfiche. We also include information we’ve had from Scott Hunter of Haywood Securities; Larry Page, then-president of the Manex Resource Group; and the dusty archives at the Northern Miner.

Note: This means our tables, while accurate, are not at all comprehensive.

Let’s get started…...

The Quintessential Bull Market: 1979-1980

The granddaddy of gold bull cycles occurred during the 1970s, culminating in an unabashed mania in 1979 and 1980. Gold peaked at $850 an ounce on January 21, 1980, a rise of 276% from the beginning of 1979. (Yes, the price of gold on the last trading day of 1978 was a mere $226 an ounce.)

Here’s a sampling of gold producer stock prices from this era. What you’ll notice in addition to the amazing returns is that gold stocks didn’t peak until nine months after gold did.

Returns of Producers in 1979-1980 Mania
Company	Price on 12/29/1978	Sept. 1980 Peak	Return
Campbell Lake Mines	$28.25	$94.75	235.4%
Dome Mines	$78.25	$154.00	96.8%
Hecla Mining	$5.12	$53.00	935.2%
Homestake Mining	$30.00	$107.50	258.3%
Newmont Mining	$21.50	$60.62	182.0%
Dickinson Mines	$6.88	$27.50	299.7%
Sigma Mines	$36.00	$57.00	58.3%
Giant Yellowknife Mines	$11.13	$39.00	250.4%
AVERAGE			289.5%

Today, GDX is selling for $26.05 (as of February 26, 2014); if it mimicked the average 289.5% return, the price would reach $101.46.

Keep in mind, though, that our data measures the exact top of each company’s price. Most investors, of course, don’t sell at the very peak. If we were to able to grab, say, 80% of the climb, that’s still a return of 231.6%.

Here’s a sampling of how some successful junior gold stocks performed in the same period, along with the month each of them peaked.

Returns of Juniors in 1979-1980 Mania
Company	Price on 12/29/1978	Price Peak	Date of Peak	Return
Carolin Mines	$3.10	$57.00	Oct. 80	1,738.7%
Mosquito Creek Gold	$0.70	$7.50	Oct. 80	971.4%
Northair Mines	$3.00	$10.00	Oct. 80	233.3%
Silver Standard	$0.58	$2.51	Mar. 80	332.8%
Lincoln Resources	$0.78	$20.00	Oct. 80	2,464.1%
Lornex	$15.00	$85.00	Oct. 80	466.7%
Imperial Metals	$0.36	$1.95	Mar. 80	441.7%
Anglo-Bomarc Mines	$1.80	$6.85	Oct. 80	280.6%
Avino Mines	0.33	5.5	Dec. 80	1,566.7%
Copper Lake	$0.08	$10.50	Sep. 80	13,025.0%
David Minerals	$1.15	$21.00	Oct. 80	1,726.1%
Eagle River Mines	$0.19	$6.80	Dec. 80	3,478.9%
Meston Lake Resources	$0.80	$10.50	Oct. 80	1,212.5%
Silverado Mines	$0.26	$10.63	Oct. 80	3,988.5%
Wharf Resources	$0.33	$9.50	Nov. 80	2,778.8%
AVERAGE				2,313.7%

If you had bought a reasonably diversified portfolio of top-performing gold juniors prior to 1979, your initial investment could have grown 23 times in just two years. If you had managed to grab 80% of that move, your gains would still have been over 1,850%.

This means a junior priced at $0.50 today that captured the average gain from this boom would sell for $12 at the top, or $9.75 at 80%. If you own ten juniors, imagine just one of them matching Copper Lake’s better than 100-bagger performance.

Here’s what returns of this magnitude could mean to you. Let’s say your portfolio includes $10,000 in gold juniors that yield spectacular gains such as the above. If the next boom cycle matches the 1979-1980 pattern, your portfolio could be worth $241,370 at its peak… or about $195,000 if you exit at 80% of the top prices.

Note that this does require that you sell to realize your profits. If you don’t take the money and run at some point, you may end up with little more than tears to fill an empty beer mug. In the subsequent bust cycle, many junior gold stocks, including some in the above list, dried up and blew away. Investors who held on to the bitter end not only saw all their gains evaporate, but lost their entire investments.
You have to play the cycle.

Returns from that era have been written about before, so I can hear some investors saying, “Yeah, but that only happened once.”

Au contraire. Read on…...

The Hemlo Rally of 1981-1983

Many investors don’t know that there have been several bull cycles in gold and gold stocks since the 1979-1980 period.

Ironically, gold was flat during the two years of the Hemlo rally. But something else ignited a bull market. Discovery. Here’s how it happened…...

Back in the day, most exploration was done by teams from the major producers. But because of lagging gold prices and the resulting need to cut overhead, they began to slash their exploration budgets, unleashing a swarm of experienced geologists armed with the knowledge of high potential mineral targets they’d explored while working for the majors. Many formed their own companies and went after these targets.

This led to a series of spectacular discoveries, the first of which occurred in mid 1982, when Golden Sceptre and Goliath Gold discovered the Golden Giant deposit in the Hemlo area of eastern Canada. Gold prices rallied that summer, setting off a mini bull market that lasted until the following May. The public got involved, and as you can see, the results were impressive for such a short period of time.

Returns of Producers Related to Hemlo Rally of 1981-1983
Company	1981 Price	Price Peak	Date of High	Return
Agnico-Eagle	$9.50	$21.00	Aug. 83	121.1%
Sigma	$14.13	$24.50	Jan. 83	73.4%
Campbell Red Lake	$16.63	$41.25	May 83	148.0%
Sullivan	$3.85	$6.00	Mar. 84	55.8%
Teck Corp Class B	$17.00	$21.88	Jun. 81	28.7%
Noranda	$33.75	$36.38	Jun. 81	7.8%
AVERAGE				72.5%

Gold producers, on average, returned over 70% on investors’ money during this period. While these aren’t the same spectacular gains from just a few years earlier, keep in mind they occurred over only about 12 months’ time. This would be akin to a $20 gold stock soaring to $34.50 by this time next year, just because it’s located in a significant discovery area.

Once again, it was the juniors that brought the dazzling returns.

Returns of Juniors Related to Hemlo Rally of 1981-1983
Company	1981 Price	Price Peak	Date of High	Return
Corona Resources	$1.10	$61.00	May 83	5,445.5%
Golden Sceptre	$0.40	$31.00	May 83	7,650.0%
Goliath Gold	$0.45	$32.00	Mar 83	7,011.1%
Bel-Air Resources	$0.81	$1.60	Jan. 83	97.5%
Interlake Development	$2.10	$6.40	Mar. 83	204.8%
AVERAGE				4,081.8%

The average return for these junior gold stocks that had a direct interest in the Hemlo area exceeded a whopping 4,000%.

This is especially impressive when you realize that it occurred without the gold stock industry as a whole participating. This tells us that a big discovery can lead to enormous gains, even if the industry as a whole is flat.

In other words, we have historical precedence that humongous returns are possible without a mania, by owning stocks with direct exposure to a discovery area. There are numerous examples of this in the past ten years, as any longtime reader of the International Speculator can attest.

By May 1983, roughly a year after it started, gold prices started back down again, spelling the end of that cycle—another reminder that one must sell to realize a profit.

The Roaring ’90s

By the time the ’90s rolled around, many junior exploration companies had acquired the “intellectual capital” they needed from the majors. Another series of gold discoveries in the mid-1990s set off one of the most stunning bull markets in the current generation.

Companies with big discoveries included Diamet, Diamond Fields, and Arequipa. This was also the time of the famous Bre-X scandal, a company that appeared to have made a stupendous discovery, but that was later found to have been “salting” its drill data (cheating).

By the summer of ’96, these discoveries had sparked another bull cycle, and companies with little more than a few drill holes were selling for $20 a share.

The table below, which includes some of the better-known names of the day, is worth the proverbial thousand words. The average producer more than tripled investors’ money during this period. Once again, these gains occurred in a relatively short period of time, in this case inside of two years.

Returns of Producers in Mid-1990s Bull Market
Company	Pre-Bull Market Price	Price Peak	Date of High	Return
Kinross Gold	$5.00	$14.62	Feb. 96	192.4%
American Barrick	$28.13	$44.25	Feb. 96	57.3%
Placer Dome	$26.50	$41.37	Feb. 96	56.1%
Newmont	$47.26	$82.46	Feb. 96	74.5%
Manhattan	$1.50	$13.00	Nov. 96	766.7%
Cambior	$10.00	$22.35	Jun. 96	123.5%
AVERAGE				211.7%

Here’s how some of the juniors performed. And if you’re the kind of investor with the courage to buy low and the discipline to sell during a frenzy, it can be worth a million dollars. Hold on to your hat.

Returns of Juniors in Mid-1990s Bull Market
Company	Pre-Bull Market Price	Price Peak	Date of High	Return
Cartaway	$0.10	$26.14	May 96	26,040.0%
Golden Star	$6.00	$27.50	Oct. 96	358.3%
Samex Mining	$1.00	$7.20	May 96	620.0%
Pacific Amber	$0.21	$9.40	Aug. 96	4,376.2%
Conquistador	$0.50	$9.87	Mar. 96	1,874.0%
Corriente	$1.00	$19.50	Mar. 97	1,850.0%
Valerie Gold	$1.50	$28.90	May 96	1,826.7%
Arequipa	$0.60	$34.75	May 96	5,691.7%
Bema Gold	$2.00	$12.75	Aug. 96	537.5%
Farallon	$0.80	$20.25	May 96	2,431.3%
Arizona Star	$0.50	$15.95	Aug. 96	3,090.0%
Cream Minerals	$0.30	$9.45	May 96	3,050.0%
Francisco Gold	$1.00	$34.50	Mar. 97	3,350.0%
Mansfield	$0.70	$10.50	Aug. 96	1,400.0%
Oliver Gold	$0.40	$6.80	Oct. 96	1,600.0%
AVERAGE				3,873.0%

Many analysts refer to the 1970s bull market as the granddaddy of them all—and to a certain extent it was—but you’ll notice that the average return of these stocks during the late ’90s bull exceeds what the juniors did in the 1979-1980 boom.

This is akin to that $0.50 junior stock today reaching $19.86… or $16, if you snag 80% of the move. A $10,000 portfolio with similar returns would grow to over $397,000 (or over $319,000 on 80%).

Gold Stocks and Depression

Those of you in the deflation camp may dismiss all this because you’re convinced the Great Deflation is ahead. Fair enough. But you’d be wrong to assume gold stocks can’t do well in that environment.

Take a look at the returns of the two largest producers in the U.S. and Canada, respectively, during the Great Depression of the 1930s, a period that saw significant price deflation.

Returns of Producers During the Great Depression
Company	1929 Price	1933 Price	Total Gain
Homestake Mining	$65	$373	474%
Dome Mines	$6	$39.50	558%

During a period of soup lines, crashing stock markets, and a fixed gold price, large gold producers handed investors five and six times their money in four years. If deflation “wins,” we still think gold equity investors can, too.

How to Capitalize on This Cycle

History shows that precious metals stocks move in cycles. We’ve now completed a major bust cycle and, we believe, are on the cusp of a tremendous boom. The only way to make the kind of money outlined above is to buy before the boom is in full swing. That’s now. For most readers, this is literally a once in a lifetime opportunity.

As you can see above, there can be great variation among the returns of the companies. That’s why, even if you believe we’re destined for an “all boats rise” scenario, you still want to own the better companies.

My colleague Louis James, Casey’s chief metals and mining investment strategist, has identified the nine junior mining stocks that are most likely to become 10 baggers this year in their special report, the 10-Bagger List for 2014. Read more here.

The article What 10-Baggers (and 100-Baggers) Look Like was originally published at Casey Research.