This week brought further evidence that Canada’s beleaguered manufacturing sector is continuing its long-awaited rebound. The RBC Canadian Manufacturing Purchasing Managers’ Index (PMI) hit its highest level in six months, with a seasonally adjusted reading of 53.5 in June, up from 52.2 in May.

PMI readings above 50 signal an improvement in business conditions, while readings below 50 signal deterioration.

The RBC’s PMI Index is a composite that is used to gauge the health of the country’s manufacturing sector with a single figure. The PMI is comprised of five underlying indexes that cover new orders (0.30), output (0.25), employment (0.20), suppliers’ delivery times (0.15), and stocks of purchases (0.10), each of which is weighted according to the figures in parentheses.

Although the latest reading is still below the trailing-year high of 55.6 that was set last October, it reverses the first quarter’s downward trend. The index’s rise was mainly driven by stronger rates of output and new business expansion.

The PMI’s underlying output index, which asks manufacturers to compare the level of production for the current month with the preceding month, showed volumes accelerating from May’s nine-month low. In fact, the pace of output growth was the fastest so far this year, as survey respondents cited improving economic conditions and rising client spending as key factors that helped boost production.

And the underlying index for new orders, which asks manufacturers to compare new orders in the current month against the prior month, signaled a “robust and accelerated rise.” However, respondents attributed this result to strong domestic demand, as export growth remained marginal.

The latter has been one of the primary focuses of the Bank of Canada (BoC), as policymakers believe a rise in exports from this sector will not only help restore it from levels that remain depressed, but also kick off a virtuous cycle in business investment.

The one kernel of good news in this area was that any rise reported in export orders was derived from clients in the US. Canada’s neighbor to the south absorbs roughly three-quarters of the country’s exports, so its economic resurgence will be play a major role in export activity. But clearly, the debt-burdened Canadian consumer continues to drive the country’s economy for now.

Still, RBC noted that June was the fifteenth consecutive month in which the new orders index had registered a reading above the key expansionary threshold of 50.

Job creation in the sector also hit a seven-month high, with the fastest expansion in payrolls since last November, thanks to increased production schedules and greater confidence on the part of employers about the economy’s growth prospects.

These results seem to dovetail with the rising trend in capacity utilization, which hit a level of 82.5 during the first quarter, the highest number since the downturn. Capacity utilization tracks the extent to which the installed productive capacity of a country is being used in the production of goods and services, as opposed to sitting idle.

One of the ways in which the BoC hopes to support the manufacturing sector is by engineering a decline in the currency through monetary easing. Although the Canadian dollar is well off its cycle high, it’s currently enjoying a short-term rally due to higher oil prices and rising inflation.

The loonie trades near USD0.937, up about 4.8 percent from the four-year low in late March, though still down about 11.6 percent from its cycle high in mid-2011.

The BoC would presumably consider the Canadian dollar’s present level as uncomfortably high, though it’s a welcome respite for US investors who hold Canadian stocks. But as we’ve mentioned on numerous occasions, ultimately a longer-term decline in the exchange rate should help support the Canadian economy, as well as the companies in our Portfolios.

And the currency’s ascent is unlikely to persist. According to Bloomberg, the consensus forecast is for the Canadian dollar to trade around USD0.90 for the next two years. While it’s likely that the BoC would prefer an even lower exchange rate, hopefully that level is sufficient for manufacturers to extend their recent run.

Portfolio Update

Shares of Aggressive Portfolio constituent Lightstream Resources Inc (TSX: LTS, OTC: LSTMF) have climbed 59.8 percent from their trailing-year low of CAD5.15 last December. Although at current levels, the stock still trades well below the price at which it was first added to the Portfolio back in early 2012, this is nonetheless a welcome reprieve for this security.

We’ve maintained our position in Lightstream largely because of its attractive portfolio of light-oil-producing assets, which could make the company a potential takeover target. And management has made progress toward fixing the balance sheet, while maintaining production and cash flow.

However, sentiment on Bay Street remains largely neutral, at two “buys,” 14 “holds,” and two “sells.” And analysts appear to believe the stock is more than fully valued at present levels, based on a consensus 12-month target price of CAD7.53, which is actually 8.5 percent below where the stock last traded.

For now, the company is still trying to get its financial house in order through divestment of non-core assets. The latest news on that front comes courtesy of CEO John Wright’s recent interview with Bloomberg First Word.

According to Bloomberg, Mr. Wright said the company is receiving “lots of interest” in its East Pembina and southeast Saskatchewan assets, which are both being actively marketed to prospective buyers by investment banks.

The company is targeting CAD600 million in dispositions, and Mr. Wright notes that there are enough assets on the block to meet or exceed that threshold. While it doesn’t need to divest these assets, it will do so if there’s a compelling offer.

Even so, analysts would want to see the company achieve a good valuation for the sale of any assets in order to offset the loss of production. And ideally, they want to see the proceeds from any sale reduce the company’s debt by an equivalent amount.

The CAD1.6 billion company has about CAD850 million drawn from its credit facility and CAD900 million in senior secured notes.

If the company can achieve its targeted level of divestments, that would take its debt burden back to a level were it would eventually have the flexibility to raise new capital and grow production in core areas.

For now, the company’s current debt burden means that it’s unable to increase its spending beyond maintenance levels, with roughly CAD500 million budgeted in capital expenditures this year just to keep production flat.

Lightstream is a buy below USD8 in the Aggressive Portfolio.