London Irvine Report May 8, 2007

The Race to Exclude China.

“A nickel ain’t worth a dime anymore.”
Yogi Berra

A race seems to have developed in the west to buy up the giant global metals and mining companies before the Chinese reorganise their FX holdings, and appear in the market later in the year flush with cash. Below, MarketWatch updates us on the latest mega merger, this time in Aluminium. While the timing may have been influenced by a change of corporate tax law in Canada, the economic rise of India and China, plus the ever depreciating over-issued dollar, make for the near certainty that metals demand will surge in the decade ahead, and that swapping iffy dollars now for future metal production, will pay better returns than hanging onto cash.

One of the savings in mega mergers is dispensing with one whole tier of corporate management and their headquarters buildings, for now Alcoa must pretend that this will not happen. In the real world, the shareholders in the combined company will make sure that it does.

Alcoa seeks heft through Alcan acquisition
Alcan asks for investor patience while board reviews $27 billion offer
By Laura Mandaro & Michael Baron, MarketWatch
Last Update: 7:01 PM ET May 7, 2007
SAN FRANCISCO (MarketWatch) — Alcoa Inc. on Monday unveiled a $27 billion hostile bid for Alcan, Inc., saying it would try to convince its rival’s shareholders of the merits of combining the North America aluminum giants after management talks failed.

Shares in the companies surged after New York-based Alcoa announced the $73.25 a share cash-and-stock offer. Alcoa shares closed 8.3% higher at $38.63 after hitting their highest level since January 2004. Alcan shares shot up as much as 35.3% to $82.60 – an all-time high that topped the offer price.

Montreal-based Alcan said its board is reviewing the offer and asked shareholders to wait for its recommendation before taking action. If Alcoa is successful, the deal would rank as the second-largest metals-and-mining takeover ever, after Mittal Steel’s $39 billion takeover of Arcelor SA last year, said Thomson Financial.

Alcoa said it is pressing on with the bid because major geographic shifts in aluminum demand and production have upped the ante for industry heavyweights.

“The world is changing quickly,” said Alcoa CEO Alain Belda in a conference call with investors to discuss the offer, which represents a 20% premium to Alcan’s Friday closing price of $61.03. “We must deal head on with the realities of our competitive marketplace and effects of globalization,” he said.

The combined company would have $54 billion in revenues and would clinch Alcoa’s spot as the world’s largest producer of aluminum and its feedstock, alumina. Alcoa would gain Alcan’s access to cheap hydroelectric power, a must for energy-intensive natural resource firms, and Alcan’s advances in making aluminum products.

These combined strengths would help it take advantage of a doubling of global aluminum consumption by 2020, led by China and India, Alcoa said.

An edge is key because rivals in China and Russia also have their eyes on the same prize. Russia’s UC Rusal and China already account for about 40% of global aluminum production, or double the combined share of Alcoa and Alcan, Belda said.

The deal could also protect Alcoa from becoming a target itself.

J.P. Morgan analyst Michael Gambardella said in a note that the offer is “as much a defensive move as it is offensive, since it leads us to believe that a strategic buyer (and/or an activist shareholder) is likely pushing (Alcoa) to do this deal.”

—–The deal also would secure Alcoa’s position as the world’s largest aluminum producer, a ranking challenged by the recent three-way merger that created Moscow-based UC Rusal, which says it can produce 4 million metric tons of aluminum.

The combination would give Alcoa the capacity to make 7.8 million metric tons of aluminum and 21.5 million metric tons of alumina, the raw material for aluminum.

“A larger asset platform and cost synergies would enable Alcoa to effectively compete with the new Russian giant and also give it leverage in negotiations with host governments in the Middle East and Asia,” mining industry consultant Alex Gorbansky, a managing director at Frontier Strategy Group in Cambridge, Mass., said in emailed comments.

Below, the WSJ thinks that all similar companies are now in play. From London it certainly seems that way. But soon existing shareholders of all mining companies will catch on to the idea that their stocks have been unloved by the market for too long, a catch up premium will probably start to emerge. New hedge fund and private equity money will begin trolling through the mining and metals companies to see which at the next level down it makes sense to consolidate. A new global investment game, is nearer its start than its end. Stay long gold and silver, but especially silver. The gold manipulation cartel can still borrow gold from central banks, with silver that’s not possible and it looks to me like they will eventually go bust.

Investors Mine
For More Deals
In Commodities
Global Demand Boom
Drives Consolidation;
Next Target: Alcoa?
May 8, 2007; Page C1
Investors have been betting that the deal-making in commodities, which is leaving a few key players dominant in certain markets, isn’t through.

—-Rather than a sign of the top for commodity prices, some investors say the deal-making could help put a lid on supply and put even more pressure on a host of commodity prices, helping the profits of a number of these companies.

“I think this is going to continue,” says John Ing, chief executive of Maison Placements in Toronto. “This has really snowballed to where no company is immune.”

—Like many recent deals, a purchase of Alcan is expected to add to earnings of its suitor in just a few years and lead to cost-cutting possibilities.

Just as important, investors are betting that the news also could make large players think of Alcoa as a takeover target.

The aluminum sector is viewed as particularly ripe for deals because demand
for the metal is strong and the number of prized assets available to buy is
limited. Demand for aluminum is expected to double in the next 15 years.

—–One reason deals are coming fast and furious: It is easier to pull off a transaction in some of these markets than in other businesses. A copper mine, for instance, is easily traded from one producer to another, while a deal for an investment bank or chain of stores can be hard to integrate smoothly.

—-The origin of buyers has also changed. The global commodity business was long dominated by giants from the U.S., Canada and other industrialized countries.
But over the past year, a new crop of consolidators are coming from the emerging markets. That is partly because mining and resource companies in emerging markets are flush with cash from the commodity boom, which they are now able to deploy to win global bidding wars.

—-Not that there aren’t plenty of cash-heavy players coming out of the more traditional markets. Last week, U.S.-based Coeur d’Alene Mines Corp. agreed to buy Australian miner Bolnisi Gold NL and Bolnisi’s majority-owned unit, Canadian miner Palmarejo Silver & Gold Corp., in a mostly stock transaction that Coeur d’Alene valued at $1.1 billion.

As for possible targets, investment bankers and traders often name U.S. Steel as a prime target in the rapidly consolidating steel business, while First Quantum is prized for its copper assets in the Democratic Republic of Congo. Lonmin, the world’s third-largest platinum producer, has seen strong recent free-cash flow growth

Staying with commodities, everything in the oil patch is just fine. Global supplies are “adequate”, says US energy Tsar Samuel Bodman. The current global oil market is “oversupplied”, chips in Qatar’s Energy Minister too.

Global crude oil supplies are “adequate,”: Bodman
Washington 05 08 07
Global crude oil supplies are “adequate,” US Energy Secretary Samuel Bodman said Monday.

“I wouldn’t say the world is awash in oil,” Bodman said, but crude oil is ” not the bottleneck” in the current oil market.
Instead, Bodman pointed to a lack of global refining capacity.

He made the comments during a news conference with Qatari Energy Minister Abdullah al-Attiyah.

Bodman said there were “plenty of reasons for refiners” to want to produce full out in coming weeks, including strong gasoline and diesel prices in the US and Europe. He said refinery utilization capacity, which hit a low of 83% earlier this year due to planned and unplanned refinery outages, was currently at 89% and should be in the low 90%s during the high-demand summer months.

Attiyah, for his part, described the current global oil market as ” oversupplied.”

Of course if that were really the case you would expect to see the US SPR out in the market buying in oil to bring the reserve back up to 100%. The Chinese version too, moving to fill their reserve ahead of next year’s Beijing Olympics. “Oversupplied” implies a price substantially below the current $60 – $62. Do they know something the market doesn’t yet know? Is Goldman planning to adjust weightings in their averages again? My guess is probably not, but a good case can be made for an out-of-the-money options collar here.

In European news, the EU has started closing ranks against “Maggie Thatcher “II”. France and Brussels seem headed for eventual collision, once President elect Sarkozy settles into office in Paris. Below, Bloomberg updates on the EU Finance Ministers closing ranks. On the narrow issue of central bank independence they are mostly right, it’s the one size fits all unloved fiat euro that’s the problem.

Sarkozy Told by Finance Chiefs, Central Bankers Not to Prod ECB
By Simon Kennedy and Sandrine Rastello
May 8 (Bloomberg) — French President-elect Nicolas Sarkozy was warned by European finance ministers and central bankers that his plan to press the European Central Bank to focus more on bolstering growth would prove futile.

Sarkozy won the presidency of the euro area’s second- largest economy after a campaign in which he attacked the ECB for restraining growth by concentrating on inflation and for hurting French exporters by encouraging gains in the euro.

That stance is now running into resistance less than 48 hours after his victory. At talks in Brussels yesterday, finance ministers from the dozen other nations that use the euro urged Sarkozy to respect the central bank’s independence and told him they would not join any French bid to undermine it.

“I don’t think that the European Central Bank can be taken, or should be taken, on a leash,” German Finance Minister Peer Steinbrueck told reporters in Brussels. “The independence of the ECB is, in regards to respect and trustworthiness, especially important.”

The rebuke came the same day the European Union warned Sarkozy against trying to pull the plug on Turkey’s bid to join the EU. During the campaign, Sarkozy made opposition to letting Turkey into the 27-nation bloc a key foreign-policy plank.

—–Sarkozy “may increase the pressure, but it’s not a good idea,” Dutch Finance Minister Wouter Bos told reporters in Brussels yesterday. Austrian Finance Minister Wilhelm Molterer said “no politician should put pressure on the ECB. The ECB is an independent bank.”

Missing from the Brussels talks was Luxembourg Prime and Finance Minister Jean-Claude Juncker, who chairs a panel of euro-area counterparts and has echoed Sarkozy’s calls for politicians to have a bigger role alongside the ECB in managing the exchange rate. That would make it difficult for the ECB to raise rates if the ministers were trying to weaken the euro.

With the losing socialist candidate all but calling on the unions, communists and minorities to act up to thwart his intended reforms, France looks to be headed for May 1968 all over again.

Nor following last week’s local elections, is the picture looking much better in centre-right moving Great Britain. Britain seems now trapped with an unpopular lame duck government for another 2 to 3 years, doomed to fight a no winners war with the new, probably minority government in Scotland. The fight for the spoils of North Sea oil is about to get ugly. Old socialist, Hugo Chavez style, two sets of meddling socialist parties need it to bribe their friends of the day. Soon the golden goose will be suffering I think. Stay long precious metals, yet another country’s people now have reason to fear for their currency.

Across the Atlantic in the land of rising mortgage delinquency, Bloomberg has reported on the rising gloom. Below, the latest darkness in a very dark tunnel leading on.

April Foreclosure Filings More Than Double Over 2006
By Bob Ivry
May 7 (Bloomberg) — U.S. homeowners entered the foreclosure process in April at more than double the rate of a year ago as tightening credit made it more difficult to refinance and a swelling supply of unsold homes made it tough to sell.

The number of homeowners in all three phases of foreclosure rose last month over the same period a year ago, according to Sacramento-based, which gathers data from county courthouses nationwide. Those receiving their first notice of foreclosure from a bank climbed 127 percent, those with homes going up for sale by auction jumped 164 percent and those whose homes were repossessed by banks went up 40 percent.

—-The March 2007 numbers compared with a year earlier were similar to the increases of April 2007 over April 2006.
First filings increased 126 percent in March 2007 compared with March 2006, notices of auction climbed 121 percent and the number of bank repossessions grew 51 percent, said.

Below, today’s NY Times has an interesting article on one of the causes of the problem. Blame it on Wall Street seems to be popular, “they made me lie, cheat and steal”.

A Cross-Country Blame Game
Published: May 8, 2007
—–What used to be a profitable partnership between subprime lenders and Wall Street banks has now degenerated into a cross-country blame game.

Lenders in California say big investment banks encouraged and pushed them to make risky loans. On Wall Street, bank executives say mortgage lenders became sloppy and did not pay enough attention to fraud. Whatever the cause, Ownit provides a vivid example of what went wrong.

William D. Dallas, the founder and chief executive of Ownit, acknowledges loosening lending standards but says he did so reluctantly and under pressure from his investors, particularly Merrill Lynch, which wanted more loans to package into lucrative securities.

He recalls being asked to make more “stated income” loans, in which lenders do not verify the information provided by borrowers and brokers with tax returns, pay stubs or other documentation. The message, he said, was simple: You are leaving money on the table — do more of them.

Mr. Dallas, a trim 51-year-old who has been in the mortgage business for more than 25 years, said he disagreed, but complied.

“If I can sell it at a profit,” he said, “why would I not do it?”

A spokesman for Merrill Lynch denied Mr. Dallas’s assertions, but declined to elaborate.

Mortgage companies like Ownit grew quickly last year by making it easier for home buyers to take out loans without proving their incomes or making down payments.

In retrospect, it was exactly the wrong time to ease credit: interest rates were rising and home prices were cresting after a sharp four-year rally. Many in the industry also suspected that speculation and fraud were rampant in many hot real estate markets on the coasts and in the Southwest.

There is no doubt that the standards in the subprime market deteriorated sharply last year. More than 44 percent of all subprime loans in 2006 were based on limited documents or none at all, up from 38 percent in 2004, according to Lehman Brothers. More than 26 percent of borrowers took out a second mortgage, indicating that they did not have enough savings for a full down payment, up from 14 percent.

—-The popularity of stated-income loans, derisively referred to as “liar’s loans” by critics, seemed impervious to evidence that the loans made it easier for borrowers and brokers to commit fraud.

According to a report by the Mortgage Asset Research Institute, for example, one lender found in a sampling of loan applications that the incomes listed on 60 percent of the applications were, on average, 50 percent higher than those on the borrowers’ tax returns.

Lenders liked the loans because they could be processed quickly. Loan officers did not have to verify bank statements, tax returns or other documents.

Borrowers also were charged a higher interest rate, often about 0.5 percentage point higher, making the loans more profitable.

“Lenders didn’t highlight to the borrower that they could save a little bit of money had they provided full documentation,” said Mark H. Adelson, an analyst with Nomura Securities in New York. “Why not get the borrower to pay a little more interest?”

Nor is the real estate problem deepening at a good time in the US economy. Below Merrill Lynch’s top economist on last week’s employment figures.

Nonfarm post mortem: This
glass wasn’t just half empty
David A. Rosenberg
North American Economist
Today’s employment report, in its entirety, was arguably the softest one we have seen at any other time in the past three years. We realize that we have had a “downbeat” view of the macro backdrop for some time, and we are sensitive to the criticisms we have received over the years that we have a tendency to overemphasize the “glass is half empty” segments of the incoming economic data releases. But try as we may, we simply couldn’t find one single drop of positive news for the economy in today’s nonfarm report – this glass was empty, period.

The headline came in light at +88,000 – not only below the 100,000 consensus estimate, but the lowest print since November/04 – and there were downward revisions to the prior two months totaling 26,000. We haven’t seen downward adjustments to the prior data in nearly a year, and these tends to be a “pro-cyclical” development in the sense that they tend to foreshadow further
weakness in payrolls in coming months. Other leading indicators such as the 0.4% month-overmonth decline in aggregate hours worked (hours lead bodies) and the 6,000 slippage in temp employment reinforce the view that the April payroll tally was not the last in the line of soft numbers coming down the pike.

—– After all, the economy has been expanding below potential for a good five quarters now. So putting that 88,000 nonfarm print for April in the perspective of a 143,000 average in the first quarter and a 188,000 average tally in 2006 illustrates how quickly the pace of job creation is now catching up to the slowdown in the real economy.

—- Bottom line is that if the labor force had not contracted in April as much as it did (-392,000), employment tally from the Household Survey was so weak (-468,000) that the unemployment rate would have actually risen just a smidgen above 4.7%.
In our view, that is the threshold for the Fed to start easing policy by the August meeting (or shall we say “removing restraint”).

To which I would only point out the Department of Labor CES Birth/Death model added 317,000 jobs of the +88,000 reported figure. No one knows if those jobs really exist. It’s a “black box” adjustment that may or may not be right.

In more EU nonsense and bureaucracy, good intentions pave the road to hell. Below, how to help kill the planet by saving £1.56. There never was a problem a bureaucrat or politician couldn’t make worse.

Tesco sends DVDs 1,400 miles to save £1.56
By Richard Fletcher, Deputy City Editor Last Updated: 2:01am BST 08/05/2007
Tesco, the UK’s largest supermarket chain, is sending CDs and DVDs on a round journey of almost 1,400 miles in order to exploit a tax loophole that allows customers to avoid paying VAT.

The disclosure is likely to spark allegations of hypocrisy – last year Tesco chief executive Sir Terry Leahy unveiled a “green plan” and pledged to reduce the retailer’s carbon footprint. Tesco is due to launch its latest green initiative today, with the
announcement that customers will be able to recycle paper-based food cartons in 100 stores. Tesco has also pledged to develop a carbon labelling scheme, which will show the carbon footprint of individual products.

However, Tesco is shipping CDs and DVDs to Switzerland and back in order to save customers as little as £1.56 on a DVD, despite claiming in its corporate responsibility review that it was “taking practical steps to reduce … energy use and greenhouse gas emissions”. is one of a number of online retailers, including Asda and Amazon, that ships CDs and DVDs to customers from outside the EU in order to exploit a tax loophole. Because the products are worth less than £18 they qualify for “low value consignment relief” and do not attract the usual 17.5pc VAT.

The loophole means that the retailer can undercut rivals and offer the latest DVDs for as little as £8.97.

—-Although the retailer is now “posting” the DVDs and CDs from Zurich, it has no capability to process the orders in Switzerland. It is understood that the orders are being processed and the envelopes packed in west London by distribution firm EUK before being shipped to Zurich.

—-“If Tesco thought it was cheaper to ship CDs to Tanzania and back I’m pretty sure it would.”;jsessionid=TEHPJP5A1W4LVQFIQMFCFF4AVCBQYIV0?xml=/money/2007/05/08/cntesco08.xml

We end today with an early wake up call for the coming Atlantic hurricane season. While this unusual storm isn’t expected to intensify into a tropical storm, nor if the early track is correct, do more than bring needed rain relief to parts of Florida, in years gone by it would have devastated at least one Spanish galleon fleet taking gold from Havana over to Spain. For those visiting the link there’s a lot of visual detail on the site.

An Early Start to the Season?
May 7, 2007 – 8:00 PM UTC

Tomorrow, waiting on the Fed.

At the Comex silver depositories yesterday, 373,555 ozs was added to Eligible at Brinks. Final figures were Registered 80.68 Moz, Eligible 51.03 Moz, Total 131.72 Moz.

The NYSE WIN system is short. NASDAQ system is flat. Since playing a black box system in the current geo-pol/economic climate, isn’t the wisest thing to do, we will adjust long positions to carry an offsetting deep-out-of-the-money matching option position to provide an automatic fail safe stop in the event another 1987 like event occurs before the PPT can step in.

More details on the WIN system are available at link below.

The monthly Coppock Indicators finished April:
DJIA: 156 up. NASDAQ: 91 up. SP500: 131 up.
The NASDAQ turned down in February and has now turned back up. The DJIA is now moving higher again from sideways. The S&P continues to move higher.
Technically, the PPT and their helpers have managed to turn the indicators bullish.

This week’s featured link: Frontier Pacific Mining Corporation. TSX.V: FRP

Frontier Pacific Mining Corporation (TSX.V – ‘FRP’) is a mineral exploration and development company based in Vancouver B.C. The Company is focused on gold and uranium projects in Europe and the Americas.

A Personal Disclosure.
Over the last few months, many of the stocks we’ve linked to have made some interesting moves. Possibly because of the LIR link, more likely because of the underlying companies and good management. Going forwards, I expect the commodities demand cycle to last another couple of decades. I expect the pace of interest in natural resource stocks to quicken. I also expect many
junior resource stocks will become takeover or consolidation targets. I expect NAFTA based resource stocks to be especially prominent.

Where I hold a position prior to a company being featured as a link, this will be disclosed. Where I will be investing during the week of linking, this too will be disclosed.

In no event should my investing or not investing substitute for doing your own due diligence, if you are considering an investment in the stock.

My circumstances and resources are probably very different to other potential investors. All stocks linked in LIR, I consider to merit the link, whether or not I invest in the company. As before, neither LIR, Global Profiles nor myself get paid for featuring a link. Lastly, because I invest in a stock it does not necessarily turn it into a sure thing winner. Happily though, neither will my investing turn it into an automatic loser.

Below is the list of natural resource stocks I hold an interest in. In no particular order, they are:
Birch Mountain Resources Ltd. BMD.
Canadian Royalties Inc CZZ.
MacMillan Gold MMG.
Quaterra Resources Inc QTA.
MBMI Resources Inc MBR.
Candax Energy Inc CAX.
Derek Oil & Gas Corp DRK.
Consolidated Spire Ventures CZS.
Cornerstone Capital Resources Inc
Pacific Asia China Energy Inc.

If you have a junior resource company you think has merit and don’t mind sharing it with others, feel free to send it along. If space permits and they have no objections, we’ll try to put up a link.

Junior resource companies are not suitable for everyone, but for those who are interested in that sector, we aim to provide companies of merit. As the new century unfolds and natural resource demand soars, I think, that there will be big money to be made from prudent investment in the sector. As always, it’s important to do one’s own due diligence if thinking about making an investment. No one has more at risk in an investment than you do yourself.

If you like this report, feel free to share it with others. It is not copyrighted but open sourced. If you have comments, witty remarks, or information to share, please send them along as well. If permission is granted, we may use them in this report.

Sometimes the daily LIR gets “bounced” out of the receiver’s server. When this happens it sometimes bounces you out of the LIR database as well. If you suddenly stop receiving the daily update but didn’t actually want a break from my daily insanity, just email me at the link below to get back onto the daily list.

Graeme Irvine

Global Profiles LLC


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