New Bank of Canada (BoC) Gov. Mark Carney announced his presence with authority March 4, cutting interest rates by 50 basis points to combat a Canadian economy stalling in the face of the US slowdown.

Carney pointed to an “intensifying” export slump caused by a slowing US economy and a high Canadian dollar, and the BoC’s statement said more stimulus is likely in the months ahead.

The closeness of the US/Canada relationship was dramatically illustrated during the run-up to and aftermath of the Ohio Democratic presidential primary; the BoC’s statement announcing the recent rate cut is a more sober and perhaps more consequential example of the countries’ ties.

But as detailed in the February CE Feature Article, Canada enjoys certain structural and fundamental economic characteristics that make it more able now to withstand weakening conditions to its south. That’s the broad rationale behind the recommendations below, which were first explored in April 2007 and November 2007.

Norbord (TSX: NBD, OTC: NXFPF) CEO Barrie Shineton described recent oriented strandboard (OSB) rates as “suicide prices.”

According to the industry Web site Random Lengths, OSB was fetching only $132 per thousand board feet, down from $140 a year ago and more than $400 a few years earlier.

Norbord reported a CAD13 million (9 cents Canadian per share) increase, compared to a fourth quarter 2006 loss of CAD1 million (1 cent Canadian per share) a year ago.

The dramatic drop in OSB prices is directly related to the slumping US housing market. Standard & Poor’s cut its rating on Norbord to BB from BBB- with a negative outlook, reflecting the deterioration of the OSB producer’s financial risk profile.

The ratings agency said it doesn’t expect the company’s 2008 results to benefit from strong cash flow generation from its European operations.

For the next two years, S&P expects Norbord to continue to face challenging market conditions.

In the long term, Norbord expects the fundamentals to remain strong for the building material. The critical element, of course, is defining “long term.” Its operations remain critically dependent on North American, more specifically US, housing. Although European operations have remained healthy, partly offsetting North American weakness, Norbord doesn’t expect to maintain its recent growth pace. 

Norbord still declared a quarterly dividend of 10 cents Canadian per share payable in March. Its ability to maintain its dividend while it survives the housing downturn justifies keeping it if you own it. But the depth, breadth and length of the downturn is too murky at this point to justify new money. Norbord is a hold. 

Russel Metals (TSX: RUS, OTC: RUSMF) reported a 22 percent year-over-year decline in earnings during the fourth quarter of 2007. Profit margins came under pressure even as revenue increased from USD593.2 million to USD598.4 million. Russel expects price and margin improvements during the first quarter of 2008.

Russel reported net earnings of CAD25.3 million (40 cents Canadian per share) compared to CAD30.6 million (49 cents Canadian per share) a year ago. Buy Russel Metals up to USD28.

Manitoba Telecom Services (TSX: MBT, MTS) continues to talk with potential partners about entering the Canadian wireless market. MTS has described the opportunity for a fourth national wireless player to compete against BCE, Telus Corp and Rogers Communications as significant.

The Canadian government decided in November 2007 to set aside a chunk of available wireless spectrum for new entrants to bid in an auction scheduled to take place in May. MTS CEO Pierre Blouin said during the company’s fourth quarter earnings conference call that a decision would be made by March 10.

MTS reported fourth quarter earnings rose nearly 9 percent on an uptick in television and Internet subscribers. Profit was 62 cents Canadian per share on revenue of CAD489.2 million. Users of the company’s Internet-based TV service grew 16 percent in the quarter, while the home-phone customer total was little changed.

Revenue from the local-phone business decreased by less than 1 percent to CAD133.4 million as fewer than 3,000 customers canceled service. Sales from long-distance calling slumped 7.3 percent to CAD90.2 million.

MTS forecast 2008 revenue of between CAD1.92 billion and CAD1.98 billion and net earnings of CAD2.95 per share to CAD3.15 per share. Manitoba Telecom Services is a buy up to USD50. 

Bank of Nova Scotia (NYSE: BNS), No. 3 among Canada’s Big Six banks, announced agreements to buy lenders in Guatemala and the Dominican Republic from Chile’s Grupo Altas Cumbres (GAC), adding 53 branches to its Latin American business.

The purchase includes Banco de Antigua in Guatemala and parts of Banco de Ahorro y Credito Altas Cumbres in the Dominican Republic. Scotiabank gets about a third of its profit from operations outside Canada and has spent about CAD2.1 billion in foreign acquisitions over the past two years in Peru, Chile and Costa Rica. The latest acquisitions are in markets in which Scotiabank has established operations.

Scotiabank sought to boost its domestic wealth management business by buying an 18 percent stake in Toronto-based DundeeWealth last September.

Shares have been trading down in sympathy with US financials. But the capital markets have held up, and Canada’s banks have avoided much of the subprime-related chaos that has hurt US banks.

We originally recommended Scotiabank based on its solid dividend and its increasing exposure to global growth markets. At this point in the game, it’s also a sound defensive play. Buy Bank of Nova Scotia up to USD58.

Canadian Hydro Developers (TSX: KHD) is the subject of an auspicious research note from Canaccord Adams analyst Mark Thompson, who described 2008 as “an inflexion point for the entire company,” as it aims to double its current 365 megawatts of installed capacity.” Canadian Hydro has about 360 megawatts (MW) of wind/hydro projects under construction, and a further 225 MW of power purchase agreements (PPA) could be executed.

Within two years, Thompson forecast, less than 10 percent of the company’s revenues will be exposed to the spot hydro market, with the rest coming from long-term PPAs.

Thompson concludes that “this makes Canadian Hydro Developers effectively recession proof, and unlike most utilities, it has substantial growth potential.” Canadian Hydro reported fourth quarter net earnings of CAD5.51 million (4 cents Canadian per share), up from CAD3.33 million (3 cents Canadian per share) a year ago. Revenues for the quarter rose to CAD17.4 million from CAD13.06 million in the prior year quarter.

For fiscal 2007, net income was CAD8.34 million (6 cents Canadian per share), down slightly from CAD8.9 million (7 cents Canadian per share) in 2006. Revenues for the year were CAD63.76 million, up from CAD48.2 million in 2006. Buy Canadian Hydro Developers up to USD5.95 or CAD6.75.

First Quantum Minerals (TSX: FM, OTC: FQVLF) announced that a commission in the Democratic Republic of Congo (DRC) has recommended that the company can retain its Kolwezi Tailings project if it fulfills obligations from an earlier contract.

The commission alleged that a locally registered company created to own the project breached provisions of the original contract, including lowering the USD130 million price for the acquisition of mining rights from state-owned Gecamines to USD15 million. The commission said only USD5 million has been paid so far, according to First Quantum, which cited a translation of a letter it received from the mines ministry.

Congo has been reviewing contracts with overseas companies with the goal of amending those deemed unfair to the state.

“The Government requests the termination of this contract to the best interest of each party,” the Congolese government said in a letter to First Quantum. “Considering the arrival of the new partner First Quantum Ltd., this partnership can however be maintained,” under certain conditions.
 
The Congolese government also wants First Quantum to give Gecamines an active role in the project’s management and provide it with a feasibility study. The study will allow the government and the company to evaluate an “equitable allocation of shares,” according to the correspondence sent to First Quantum by the government.

First Quantum maintains its current contract is “valid and binding” and will respond to the government’s letter after consulting with its partners on the project.

First Quantum owns 65 percent of the Kolwezi project, while Industrial Development Corp of South Africa controls 10 percent and International Finance Corp owns 7.5 percent. Gecamines and the Congo together own the remaining 17.5 percent.

First Quantum reported that fourth quarter profit more than doubled, as copper production jumped at most of the company’s mines and costs eased. The company earned CAD135.3 million (CAD2 per share) in the final three months of 2007, up from CAD60.9 million (91 cents Canadian per share) a year ago. Sales doubled to CAD443.3 million from CAD216.4 million.

Quarterly copper production climbed to 72,466 ton from 46,531 ton; the company sold copper at a realized price of CAD2.56 a pound, up from CAD2.32, and cash operating costs were 14 percent lower in the quarter. First Quantum expects to produce 310,000 ton of copper in 2008. First Quantum Minerals is a buy up to USD103.

Shaw Communications (NYSE: SJR, TSX: SJR.B) is also contemplating entering the Canadian wireless market. Speculation has centered on Quebecor partnering with either Shaw or MTS to bid on spectrum.

Shaw reported net income rose to CAD112.2 million (26 cents Canadian per share) in its fiscal 2008 first quarter ended Nov. 30, 2007, from CAD81.1 million (19 cents Canadian per share) a year earlier. Sales were up 11 percent to CAD743.8 million.

Shaw was able to attract phone subscribers from Telus, adding about 50,000 digital-phone service customers in the quarter. Cable companies, including Shaw and Rogers Communications, the industry leader, grabbed about 1.9 million phone subscriptions at the end of 2007, or about 16 percent of the Canadian market. That’s up from 9 percent in 2006. Shaw Communications is a buy up to USD24.

Talisman Energy (NYSE: TLM, TSX: TLM) was the worst performer among Canada’s nine largest energy companies in 2007. Fourth quarter profit, however, was up 9.7 percent, largely on a reduction in Canadian tax rates.

Net income rose to CAD656 million (63 cents Canadian per share) from CAD598 million (54 cents Canadian per share). Results included a credit of CAD244 million for future income taxes. Sales were up 13 percent to CAD2.1 billion.

Production of oil and natural gas fell 8.2 percent to 446,000 barrels of oil equivalent per day (boe/d). Output from continuing operations, which excludes assets sold, dropped 2.7 percent.

Fourth quarter costs for drilling unsuccessful wells rose 83 percent to CAD322 million. Exploration expenses rose in Alaska, and it spent more on deep wells in Alberta. 

Talisman is off nearly 5 percent thus far in 2008 after posting a 7 percent decline in 2007. But the worst may be over after a year of transition. Talisman disposed of assets producing 20,000 boe/d in the North Sea and Canada during 2007 and also appointed a new CEO. The company is expected to grow approximately 3 to 8 percent in 2008 and 5 to 10 percent in 2009 and 2010.

Talisman is also in the process of conducting a strategic review of its operations to help unlock growth in the long term. Its exploration portfolio is still solid, and it boasts a decent track record of reserves, production and cash flow growth. Talisman Energy is a buy up to USD24.