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  2009 in Review: Canadian Stocks

BENJ GALLANDER and BEN STADELMANN

Wednesday, January 6, 2010

With Santa busy delivering his presents, we surmised that he might have scrutinized our Canadian results to see if we were worthy of some lovely gifts under the tree. Or does he outsource this work to the elves?

Given gold's climb, it's an apt sector to begin with. Our pick in this arena, for the second time, was Richmont Mines. On our first go-around with this stock, circa 2000, it was purchased at $1.81. Two years later it was spun out at $4.60. It was featured in this space last November, soon after we picked it up. Who says history doesn't repeat itself?

The stock moved up quickly, passed our previous sale price and was closing in on the $5.00 mark, but we decided there was more upside yet to be explored, this time with $6.24 as the target. Unfortunately the price regressed after the quick run, and is currently just under $4.00.

We're pretty confident that there is another upward run from this level yet to come. Evidently, so is Greg Chamandy, who has recently bought a substantial piece of the company, and was just elected as the chairman. He specializes in developing small companies into much larger ones. Gildan Activeware is the best known.

The most recent quarter, during which an ounce of gold averaged $899, featured revenue of $19.1 million, up from $16.5 million in the same period last year. However, the company was just slightly north of break-even.

Currently, though, this unhedged miner with no long-term debt is receiving much higher prices for output than last quarter. That is being offset somewhat by higher production costs at the Island Gold and Beaufor mines, which increased year over year from $615 to $780 per ounce because of lower recovered grades. That cuts big time into the bottom line.

However, with the price of gold resting above $1,000, the bottom line should be buoyed. Though better than a double since our purchase, the future for Richmont looks shiny.

In February, waste management outfit Newalta was the topic. Trading at just under $4.50, the corporate plan was for a booming annual dividend of 80 cents, a level we found to be exceedingly generous, given the economic circumstances. Instead, we suggested that a regime of austerity and debt reduction was in order.

Lo and behold, just a couple of weeks later management was singing a very different tune, with the announcement of cuts to capital expenditures and expense reductions. And, in order to effectively manage debt, the proposed annual dividend was drastically slashed to just 20 cents.

That "bad" news drove the stock much lower, but one of us was so impressed by the about-face that he was delighted to purchase the stock at $2.46. In June the position was spun out at $5.29 due to fear that its recovery was getting ahead of itself.

The gain was lovely and quick, but the primary hazard of the great rally of 2009 was setting sights too low after the March madness, which fooled investors into parting with good companies. Newalta's business is rebounding nicely, and the stock is now comfortably cruising over $8.

A sidebar of our article on Marriott International involved the Rosseau, a JW Marriott Resort and Spa in Minett, Ontario. This is one of those hotel-condo developments that became quite popular over the past decade. When Benj stayed there, he absolutely adored the place, but enjoying being somewhere and investing in it are very distinct propositions.

The conclusion in March was, "While six months ago the price point of a purchase was less questionable, given the current economic conditions, virtually all real estate acquisitions at 2008 prices are more dubious." That certainly proved correct as Rosseau Resort Developments Inc. went bankrupt a couple of months later and the condos went on sale at a substantial markdown.

In August, Canadian agricultural leader Viterra was our question in a column titled "To harvest or not to harvest." This was another second-time play for us, the first under its previous incarnation as Saskatchewan Wheat Pool, which provided a very snappy gain of almost 60 percent in just over two months.

Repurchased at $5.67 in 2005, 55 percent was sold in March 2008 at $13.65. The stock then dropped to $9 during the dog days of summer, and with crops looking poor and the debtload becoming toppier with the takeover of Australia's ABB Grain, the risk of holding seemed to be growing.

However the decision was made to stand pat, a key factor being that historically VT tends to do well towards year end. Currently, the stock trades around $9.75, a distance from the $12.74 target price. Canadian Business magazine Chief Executive of the Year, Mayo Schmidt, has clear plans to see the price rise back to teenage levels. That would be lovely.

Though imperfect, overall we're pretty pleased with our Canadian picks. Next up, our American positions and the results from our investment letter.


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