Newsletter Week 29
WEEK 29 | JULY
Financial Markets & Economies: Strong Rebound
Good to know: Update on Inflation
Your portfolio highlights: Brookfield Asset Management, Solar Resources Fund, Endeavour Mining
In other news: Fairfax Announces Conference Call
Financial Markets & Economies
A lot of investors are optimistic about the infrastructure sector seeing the huge spending bill proposed by President Joe Biden. There was uncertainty about it this week as a key funding provision was removed from the $1.2 trillion infrastructure bill on Sunday. The bill was later blocked by Senate Republicans later on Wednesday. There will be more attempts on advancing the bill, however. Investors that positioned themselves for the boom in infrastructure spending are on the lookout for the developments around this bill. Equity markets also started the week on a down. Stocks were in a sell-off on Monday which became the worst trading day of the year. The market rebounded on Tuesday and rallied the days after ending the week at a record high. The sell-off was attributed to Covid-19 concerns which ended-up being a short-term panic again. Fundamentally nothing changed. Some strategists suggest investors ignore the news headlines which are nothing but panic inducing. Others believe that the sell-off fear might not have been due to the resurgence of the virus itself but the fear of stagflation in the case of a resurgence. Either way, if investors stay true to fundamentals and (re-)allocate capital to inflation resistant securities, there would be no need to panic.
Major Market Indices - 1 Week Movement
Purple - Nasdaq
Dark Blue - S&P500
Light Blue - DOW Jones
Good to Know
We avoided talking in depth about inflation for a couple of weeks now but it is time to give you an update. The U.S. Consumer Price Index (CPI) increased by 0.9% in June which was higher than the consensus and even higher than the analysts’ range. Still, it did not bother the market. The market seems to be ok with the inflation so far. The inflation is still believed to be transitory since it is driven by a one-time event, the re-opening of the economy. This one event creates a chain reaction. Re-opening economies leads to increased travel, lodging, rental, entertainment and sporting events. Once the economy is fully opened and we go back to “normal” this jump in output will be a thing of the past. Prices will stabilize. There are certain items that are experience price jump due to supply shortages and not a spike in demand. These are items like semiconductors, vehicles, and food ingredients. Although these are cause by the supply side, these are also temporary. Production and supply chain issues are also factors that will easily be resolved post-pandemic.
Projected Annual Inflation Rate in the U.S. 2021-2026
Your Portfolio Highlights
Brookfield Asset Management (BAM) has been so active this week that we could have dedicated the whole newsletter to the company. We will try to keep it succinct. Shareholders of Brookfield Asset Management (BAM) and Brookfield Property Partners (BPY) agreed to the terms of the combination arrangement of the two companies. For each unit of BPY 0.4006 shares of BAM will be given or $18.17 in cash or 0.7268 New LP preferred units subject to proration. Shareholders that did not make an election will receive the default consideration of 50.4678% cash, 41.8104% shares and 7.7218% preferred units. BPY (and BPYU) will be removed from the S&P/TSX Composite Index and S&P/TSX 60 Index prior to the open of trading on Tuesday, July 27, 2021. Brookfield is exploring the takeover of Alstria Office REIT-AG (AOX). Alstria is a German real estate firm with about 110 commercial properties in Germany’s major cities such as Hamburg, Franking, and Berlin. The company is valued around €3.3 billion, and Brookfield already owns 8.35% of the company. Brookfield is definitely optimistic about the future of business hubs as it has been active with real estate deal making and just recently made an acquisition in Europe. Since we are talking about real estate, Brookfield is also planning to launch its own private real estate investment trust after taking over the management of a property portfolio from its subsidiary, Oaktree Capital Management. Oaktree is making the move to enhance the scale of the company by leveraging Brookfield’s track record as owner and operator of real estate. The long-term plan is to expand the portfolio so to compete with rival REITs managed by Blackstone Group Inc. and Starwood Capital Group. The new company will be named Brookfield Real Estate Income Trust Inc. and it will be formed by transitioning the advisory role of Oaktree Real Estate Income Trust Inc. over to Brookfield. We mentioned in previous newsletters that the Brookfield backed battery maker, Clarios International, is in the process of an initial public offering (IPO). The company announced this week that it is aiming for a valuation of up to $10.7 billion. Clarios will sell about 88.1 million shares between $17 and $21 each which comes down to about $1.85 billion max. Clarios could be valued at $11.2 billion at the maximum price target. Last but not least, Brookfield announced that its 2021 second quarter conference call & webcast will be held on Thursday, August 12, 2021, at 11:00 a.m. (Eastern Time). The results will be released on August 12th before 7:00 a.m. (Eastern Time).
The Solar Resources Fund (SRF) seeks substantial capital appreciation by investing primarily in a diversified portfolio of about forty international publicly traded equity securities. The fund may also invest in equity funds, but not more than 10% of its net assets in the securities of a single fund. The fund concentrates its research and capital on undervalued resource companies, such as precious metals, base metals, and the energy sector (oil, gas and renewables). Some of these investments carry a greater risk, but this allows for extraordinary return potential in the future. The fund returned +5.72% so far this year. One of the companies we would like to highlight this week is Endeavor Mining Corp. Endeavour Mining Corp returned more than +207% since purchase.
Endeavour Mining (EDV) is a multi-national mining company that owns and operates the gold mines in Côte d'Ivoire and Burkina Faso. The company is headquartered in the Cayman Islands but is operated from its corporate office in London, United Kingdom. The company’s operating assets are located in Senegal, Cote d'Ivoire, and Burkina Faso, as well as a portfolio of development projects and exploration assets in the Birimian Greenstone Belt across West Africa. Why West Africa? West Africa was the # 1 country when it came to global gold discoveries these past 10 years. West Africa is also the 2nd largest gold producing region after China. Endeavour has focused on West Africa by investing north of $2 billion and became the #1 gold producer in the region. About 20% of the company’s exploration is spend in West Africa. The purpose of Endeavour is to produce gold that provides value to society. The company does so while protecting and promoting the places where the gold comes from. Their work is a partnership helping to create resilient and self-sustaining communities where people are equipped with the skills, knowledge and expertise needed to prosper. Endeavour is trusted to unlock the full benefits of the material they mine for all those invested in the discovery and production. Endeavour seeks to obtain operational excellence, work on project development, unlock exploration value, and actively manage its portfolio. The company’s objectives are to keep costs below $900 per oz as they crank up production, diversify across multiple countries and mines, increase Return on Capital Employed (ROCE) by 20% with strong capital allocation discipline, and reach annual production of more than 1.5 million oz per year. The Endeavor Mining stock is listed on the Toronto Stock Exchange in Canada and over the counter in the United States. According to Chief Executive Sébastien de Montessus, Endeavour will be moving its primary stock exchange listing to either the New York Stock Exchange or the London Stock Exchange. It is interesting to note that the company’s stock has been performing better than the Canadian stock index since its inception in 2015. The stock is valued around $35.60 at the moment.
*Please visit the Endeavour Mining website for more information or click on one of the images below for their latest presentation.
Endeavour Mining vs S&P TSX
In Other News
Fairfax Announces Conference Call on July 30th to discuss its second quarter results.