A Comment -- General Comments From an Expert (A Commentary)

Rare earth elements? The problem at this point is just the small business. It’s the size of the copper market that allows you to hedge, build a mine and use public markets to do that. In rare earth elements, the sizes of the projects are so small they can become obscure, and nobody cares. He is of the opinion that you should just ignore them.

Markets. There are rays of light. This year will be better than last year. We are bouncing along the bottom. Quality is going to rise above the rest and so mining is where we want to be. This will be a fantastic year to acquire the few fantastic companies out there. We are down 80 something percent from the peak in 2011. We are seeing peak gold production right about now and it is projected to drop off. The peak in discoveries was in 1995 and it takes 10 to 20 years to put a mine into production. Mines are now starting to run out of ore. There are a lot of deposits out there that are margin to uneconomic to extract. You need to identify the few projects that are economic. As soon as an investor finds his thesis is not working, he needs to sell and move on.

Silver. Most comes as a byproduct from other production and there is no shortage. He is not a silver or gold bull. He has no opinion on silver.

Energy. This downturn is not because of the supply side with US shale oil growth, which has always been there, but it was the 2^nd half constant revision on the demand side, because of issues around China slowing and Europe not getting back into normalized growth. Thinks the worst is over. There has been a good move in January. If we see a normalized recovery, something closer to $65, he thinks there is still 20%-30% upside in the equities themselves.

Gold. We are a couple of years into this gut wrenching process of becoming more efficient, both in terms of capital and operating costs. This is an industry that was very inefficient with its capital in a very generous market with its equity availability for a number of years. There were some very inefficient acquisitions, and projects were not necessarily run as efficiently as they should have been. With prices now at $1100-$1500 an ounce, you start to see companies really focusing on the bottom line, because the margins just aren’t there. There has been a bit of improvement, but you have to be very specific on how you look at how cost reductions have come about. Are they really improving their operations or are they doing simple things like cutting out exploration, reducing headcount, or deferring sustaining capital spending?

Mining. There is a sense of capitulation. Thinks executives have accepted the situation they are in, and believe this is something for the long term and have to focus on becoming more efficient with their capital and reducing costs for the long-term. Also, becoming smarter with any M&A activity. Getting smaller is not a negative thing in this market, and the seniors are more amenable to reducing their size.

Junior mining companies? We have seen some M&A activity over the last several months. The process has started to see some of the higher-quality projects, which are a bit stranded, find a home in a bigger entity that is better financed and has better availability of capital with lower costs. He expects this process will continue slowly. One CEO has said that there are probably only around 100 real financeable undeveloped projects in the market right now. That will mean very concentrated capital flows.

REITs. There have been great returns this year. Coming into the year, Canadian REITs had underperformed all other global real estate sectors, especially the US. A lot of investors started to notice so, especially with the changing currency, decided this might be a good time to invest in real estate. Investors always like real estate in Canada as a source of stable income. People coming into the sector are going to gravitate towards the larger more liquid REITs. However, he has also noticed that some of the smaller ones were really being neglected, and there is some quality real estate among some of those names. The sectors that are getting a lot of the attention right now starting with retail are those with Hudson Bay, Target. In these, you want to be in the highest quality malls. On the other hand, you can go for a grocery anchored strip centre of needs based retail. Also, likes industrial, which had a weak year last year. He is underweight Office due to construction. Sometime this year you want to be buying into Alberta.

Markets. We are back at the peak of the .com boom. But the NASDAQ is a different index today. Back then they were discounting 15 years worth of earnings into what the Internet was going to be. The round numbers like the NASDAQ 5000 level today for a nanosecond have some physiological significance. But now in the Russell 2000 more than 50% of the stocks are more than 10% below 52 week highs. A narrower group of stocks are leading the index higher. There are some reasons to say it is stretched here. He would prefer the Dow now. He was overweight Europe Nov/Dec last year and then reduced, but was wrong because it is still strong. This week, or next, the ECB will launch their QE program. China cut interest rates. China is actually growing at only 4 or 5 percent and real estate prices are falling in some places. He would be underweight exposure there. Russian markets are poised for a snap back, but you can’t hedge the currency risk away. There is probably another rate cut coming in Canada, but probably not this week.

ETF.com in the US gives an overview of all the ETFs available. There is not such a web site in Canada that he is aware of.

Withholding tax. Dividends from a US ETF are pure income.

Educational Segment. Rig Count. Baker Hughs is the biggest driller in the world. The Rig Count got cut last year, but it wasn’t until the last two months that they really cut out rigs. Most of those cut were not very productive so they did not cut out much production. The seasonal period for oil starts out at the beginning of the year for the first half. Inventories of oil are the biggest they have ever been in history. They are expected to build for the next couple of months. He thinks oil prices will re-test the lows of the last year over the next couple of months.

FRF-T: ETF that is launching. The assets have to build up to $10 million within the first year in order for it to be profitable. Size does not matter in the beginning. If they shut it down after a year then you get your money back.

Markets. In the last year we saw a slow steady water torture instead of a capitulation sell-off that would normally mark a market bottom. Half the speculative listings in the world markets have no value. Almost none of them have gone under. 4 or 5 years from now we will look at 2014 as ‘the good old days’. He is a contrarian and buys what everyone else is afraid to buy. We are in an 83% off sale and it is not unattractive. We are seeing the beginnings of an M&A cycle. At the bottom it cannot occur because management have put in such ridiculous change of control provisions that mergers are impossible given the payouts for officers and directors. In the middle part of the market we are starting to see M&A.

He doesn’t see the ring of fire being viable in the next cycle. The infrastructure is challenged. The social and political infrastructure in Northern Ontario combined with low commodity prices and a relatively high cost of capital means you won’t see it work for quite some time.