Asia-based sovereign wealth funds (SWF), China Investment Corp (CIC) most prominently, have been first in line to snap up cheap resource assets in the aftermath of the greatest credit crisis since the Great Depression. Emerging economies are channeling the vast excess foreign currency reserves accumulated during the middle of the current decade to establish long-term positions in companies operating in critical sectors.

Among the most critical: natural resources. And this means SWFs and their close cousins, state-owned enterprises (SOE), have been beating tracks, and will continue doing so, to Canada.

Korean National Oil Company’s (KNOC) decision to buy Harvest Energy Trust (TSX: HTE-U, NYSE: HTE) for USD4.1 billion is curious on many levels. Primarily, why would KNOC want what’s widely considered a sketchy, far-flung collection of assets?

KNOC is the national oil and gas company of South Korea and is one of the most important industrial companies in the country. It oil reserves of around 600 million barrels and gas reserves of about 10 billion cubic meters are spread about Vietnam, Libya, Peru, Indonesia, Nigeria, Yemen, Kazakhstan, Russia and South Korea, and it’s actually developing its own questionable history in Canada. The SOE paid Newmont Mining (TSX: NMC, NYSE: NEM) USD300 million for a set of oil sands leases; KNOC has yet to see any production from these assets.

The difficulty resource-hungry SWFs and SOEs face is that most of the plum assets–productive and located in safe jurisdictions–are already under the control of global resource heavyweights.

Bountiful fields are available…in hot spots such as Africa, Central Asia and the Middle East. SWFs and SOEs haven’t avoided these areas entirely, but this particular opportunity to pick up a mediocre asset even at a questionable premium in a quiet neighborhood was, apparently, too good for KNOC to pass up.

Harvest and its ilk aren’t attractive to the Super Oils, but KNOC can still add value with second-tier assets: According to the Korean government, Harvest will boost the country’s oil and gas production from foreign fields by 8.1 percent.

KNOC will be able to bankroll necessary repairs at Come By Chance. Because it’s essentially backed by the state it will be able to hold the asset until refining margins improve and the business becomes more profitable.

There are secondary interests as well. Much of the feedstock for Come by Chance originates in the Middle East, providing KNOW with access to local knowledge in the world’s most important petroleum-exporting region at a time when competition for resources among developed and emerging economies is fierce. Similarly, KNOC may be able to use holdover Harvest talent to get to work on its oil sands leases.

For Harvest, particularly its unitholders, the offer signals a dramatic turn in fortune. Management put together disparate properties, and bought the Come by Chance refinery for USD1.6 billion in 2006, taking on a ton of debt at what’s proven to be a market top. Refining margins collapsed in 2007, and when it came time to refinance the debt on its balance sheet Harvest found a frozen credit market.

As of the end of the second quarter Harvest’s debt-to-trailing 12-month cash flow ratio was 4-to1, about double what would be a prudent level. And apart from its piece of the prolific Bakken formation in Saskatchewan, Harvest doesn’t own much of interest to anyone. Well, other than KNOC, and, with the backing of the Korean government it has access to cheap and deep pockets that make the debt situation much more manageable.

As is the case with many investments made by SOEs and sovereign wealth funds (SWF), “long-term return” has a much broader meaning that it does to more commonplace institutional or individual investors like you and us.

Harvest debuted as an income trust in 2002 at CAD8 per unit. The CAD10 per unit cash out on top of the approximately CAD21.68 per unit to original holders is a decent return. A lot of people bought that thing above CAD30, though, and its prospects as an operating company were dimming. Its next set of moves likely would have included asset sales.

Its susceptibility meant it suffered as much as anyone during the credit crunch; interest expense already accounted for a large chunk of cash flow, and management arguably made things worse by holding the distribution at an unsustainable level for too long.

The unit price has bounced along with everything since early March, a little higher even than the likes of ARC Energy Trust (TSX: AET-U, OTC: AETUF), Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF) and Vermilion Energy Trust (TSX: VET-U, OTC: VETMF). But those names have rallied by double-digits in 2009, too, and they’ll be paying market-beating yields to 2011 and beyond.

As for Harvest, sometimes it’s better to be lucky than good.

The Contender

“It is fair to say that the winner of the global economic crisis is Beijing.” So declares Fareed Zakaria in a piece published on the web Oct. 17, 2009, and appearing in the Oct. 26, 2009, print edition of Newsweek.

Coming Attractions

Well-run Canadian trusts and high-yielding corporations have maintained and raised their double-digit dividend yields throughout North America’s worst economic calamity in decades. Now they’re on the verge of handing their lucky investors windfall capital gains as well, thanks to a coming wave of takeovers, a surging Canadian dollar, runaway global demand for resources and, ironically, as tax-advantaged Canadian trusts convert to taxable corporations.

Ever regretted not buying oil at USD20 back in 2001? Select oil and gas trusts are selling for the equivalent–a tiny fraction of the value of their proven reserves in the ground.

Would locking in a 12 percent yield for the rest of your life in a sleep-easy power company interest you? What about a 50 percent gain in two to three months, simply by buying an unloved stock?

Many people are worried about the US economy and the US dollar. But how many know the best insurance is as easy as buying Canada, where a rising Canadian dollar provides complete protection from Uncle Sam’s profligate ways?

It’s all here when you buy Canada–and Canadian Edge Editor Roger S. Conrad and Associate Editor David Dittman will show the way during a unique, interactive conference call December 17 at 1:00 pm ET. Stay tuned to this space for details.

The Roundup

Two more CE Portfolio recommendations announced earnings since the last issue of MLM, Conservative Holding RioCan REIT (TSX: REI-U, OTC: RIOCF) and TransForce (TSX: TFI, OTC: TFIFF).

RioCan reported third-quarter funds from operations (FFO) or FFO fell 12 percent because of higher interest expenses. FFO was CAD71.6 million (CAD0.30 per unit), down from CAD81.2 million (CAD0.37 per unit) a year ago.

The decrease in FFO is primarily the result of increased interest expenses, which rose CAD8.3 million, lower gains on properties held for resale in the third quarter of 2009 versus those of a year ago, and decreased fee and other income. Net operating income (NOI) from rental properties grew by CAD2 million, which partially offset the FFO decline.

Rental revenues increased CAD6.8 million in the third quarter versus 2008. Same property NOI decreased by 0.6 percent on a year-over-year basis but increased 0.2 percent for the nine months ended Sept. 30, 2009. Same-property growth increased 1 percent quarter-over-quarter. Same-store growth in the third quarter decreased 1.5 percent year-over-year and decreased 0.5 percent for the first nine months of 2009 versus 2008. On a quarter-over-quarter basis same-store NOI grew by 0.5 percent.

The REIT maintained occupancy of 97.3 percent during the period and also reduced leverage to 55.7 percent of assets from 55.8 percent. RioCan had approximately CAD214 million in cash on hand as of Sept. 30, 2009.

RioCan also announced the formation of a joint venture with US-based Cedar Shopping Centers to purchase seven grocery-anchored shopping centers in Massachusetts, Pennsylvania and Connecticut. RioCan will pay USD141 million and assume USD75 million in debt in exchange for 80 percent of the venture; Cedar will control the remaining 20 percent. In addition RioCan expects to acquire on a fully diluted basis 15 percent of Cedar Shopping Centers, or 6.7 million shares at USD6 per. RioCan REIT is a buy up to USD16.

TransForce, still coping with the effects of the global economic downturn, reported a decline in third quarter revenue, but cost containment and operating efficiency efforts allowed the company to maintain its EBITDA margin at 13.7 percent, basically flat with year-ago levels.

In the third quarter total revenue decreased 24 percent year-over-year to CAD451.4 million, while revenue excluding fuel surcharge decreased 18 percent to CAD418.9 million. Earnings before interest, taxes, depreciation and amortization (EBITDA) decreased by 25 percent year-over-year to CAD62 million.

Looking at the situation on a sequential basis, however, provides a little more comfort. Revenue decreased only 0.6 percent from the second quarter of 2009 to the third, suggesting that while economic conditions continue to weigh on TransForce, the situation is not as bad as it was in the first half of the year. EBITDA actually was up in during three months ended September 30, from CAD59.8 million during three months concluded June 30 to CAD62 million. Cash flow from operations was CAD51.9 million, compared with CAD66.9 million in the third quarter of 2008. Interest expense decreased to CAD8.2 million from CAD12.3 million on debt reduction and lower interest rates.

TransForce reported net income of CAD17 million (CAD0.19 per share), down from CAD26.5 million (CAD0.31 per share) a year ago. TransForce, with revenue stabilizing and cost-cutting leaving it lean, mean and poised to make acquisitions, is a buy up to USD8.

Here are tentative earnings announcement dates for CE Portfolio recommendations, followed by the Roundup of news from How They Rate companies.

Conservative Holdings

• AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF)–November 5*
• Artis REIT (TSX: AX-U, OTC: ARESF)–November 11
• Atlantic Power Corp (TSX: ATP-U, OTC: ATPWF)–November 12*
• Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF)–November 10
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)–November 11*
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–November 3*
• Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)–November 13
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)–November 5*
• Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF)–October 29
• Innergex Power Income Fund (TSX: IEF-U, OTC: INRGF)–November 5*
• Just Energy Income Fund (TSX: JE-U, OTC: JUSTF)–November 6*
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)–November 3
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–November 4
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF)–November 12
• Pembina Pipeline Income Fund (TSX: PIF-U, OTC: PMBIF)–October 28
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF)–November 5

*Bloomberg estimate

Aggressive Holdings

• Ag Growth International (TSX: AFN, OTC: AGGZF)–November 12
• ARC Energy Trust (TSX: AET-U, OTC: AETUF)–October 30*
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–November 4*
• Daylight Resources Trust (TSX: DAY-U, OTC: DAYYF)–November 5*
• Enerplus Resources (TSX: ERF-U, NYSE: ERF)–November 13
• Newalta (TSX: NAL, OTC: NWLTF)–November 5*
• Paramount Energy Trust (TSX: PMT-U, OTC: PMGYF)–November 6*
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)–November 11*
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)–November 5*
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–November 13*
• Trinidad Drilling (TSX: TDG, OTC: TDGCF)–November 4
• Vermilion Energy Trust (TSX: VET-U, OTC: VETMF)–November 10*

*Bloomberg estimate

Electric Power

TransAlta Corp (TSX: TA, NYSE: TAC) has acquired and paid for approximately 125 million common shares of Canadian Hydro Developers (TSX: KHD, OTC: CHDVF) tendered in response to its CAD5.25 per share offer. These shares represent approximately 87 percent of outstanding Canadian Hydro shares. TransAlta has also extended the deadline to tender shares to 5:00 pm ET Nov. 3, 2009. Hold TransAlta Corp; tender your Canadian Hydro Developers shares if you haven’t already done so.

Primary will pay interest either at an adjusted London Interbank Offered Rate (subject to a 2 percent minimum) plus 4.5 percent or an alternate base rate (subject to a 3 minimum) plus 3.5 percent. The loan is subject to 0.25 percent quarterly scheduled amortization payment and quarterly mandatory prepayments of 100 percent of Primary’s excess cash flow. Primary Energy Recycling Corp is a sell.

Real Estate Trusts

Huntingdon REIT (TSX: HNT-U, OTC: HURSF) has agreed to sell a 62,099 square foot retail property in Calgary, Alberta, known as Vista Landing for CAD12 million. The sale is expected to close April 1, 2010, and is expected to result in net cash to Huntingdon of approximately CAD8.3 million. The REIT expects to record a gain on the transaction of approximately CAD3.8 million. Sell Huntingdon REIT.

Lanesborough REIT (TSX: LRT-U, OTC: LRTEF) is selling its six property, 404-suite portfolio of apartment properties in Prince Albert, Saskatchewan for CAD18 million. The sale is scheduled to close Nov. 30, 2009, and is expected to result in net cash to Lanesborough of approximately CAD5 million. Lanesborough acquired the properties in 2005 for CAD15.54 million.

The REIT also announced an agreement to sell a 93-suite apartment property in Sherwood Park, Alberta, for CAD9.1 million. The sale is scheduled to close on Dec. 1, 2009 and is expected to result in net cash of approximately CAD3.6 million. Lanesborough bought the property in 2006 for CAD6.79 million.

Lanesborough will use the CAD8.6 million of net cash from the asset sales to repay other higher-cost interim mortgage debt and for general working capital purposes. Lanesborough REIT is a sell.

Natural Resources

TimberWest Forest Corp (TSX: TWF, OTC: TMWEF) reported a distributable cash loss of CAD3.8 million for the third quarter, an improvement over the CAD5.4 million loss recorded in the third quarter of 2008.

Management noted that, despite a slight improvement in US housing starts during the period, Asian markets drove the improvement. Log exports to China and Korea were up 160 percent year-over-year.

TimberWest’s real estate unit reported revenue of CAD7.9 million, more than half the year-to-date total of CAD14.8 million. That revenue is accelerating for Couverdon Real Estate is a significant positive for a company that basically completely remade itself in response to North American housing implosion.

The company has also reached an agreement with its lenders to waive covenants in its loan agreements through 2010 and 2011. This will help the company as it attempts to streamline operations and manage cash flow to position it for an economic recovery. TimberWest Forest Corp is a sell.

Energy Services

Precision Drilling (TSX: PD-U, NYSE: PDS) reported net income of CAD71.7 million (CAD0.25 per unit), down from CAD82.3 million (CAD0.61 per unit) in the third quarter of 2008. Revenue fell 11 percent to CAD253.3 million. Overall drilling activity fell by more than half.

The Grey Wolf acquisition helped offset continued weakness in Canada, and the US diversification should pay off even further as work in Pennsylvania’s Marcellus Shale formation expands to include 12 working rigs, up from two in mid-2009.

Although the worst may be over, CEO Kevin Neveu cautioned that fourth quarter drilling activity is likely to be consistent with that of the third. He also suggested that customers may leave 2010 budgets unchanged from 2009 levels.

“In Canada we have just completed the slowest summer after the weakest spring following the poorest winter in the last two decades. I’m going to run out of adjectives for the word ‘poor’ if this cycle continues much longer,” said Neveu in a conference call to discuss the quarter. As ever, the level of activity is directly related to the price of natural gas. Well-positioned to rebound amid emerging signs of strengthening fundamentals, Precision Drilling is a buy up to USD6.

Energy Infrastructure

Inter Pipeline Fund (TSX: IPL-U, OTC: IPPLF) announced, following its annual strategic review, a 7.1 percent dividend increase and strongly hinted that it intends to maintain its current payout beyond Jan. 1, 2011. Inter Pipeline is a Canadian limited partnership, not an income trust, and is therefore difficult, if not impossible, for US-based investors to buy.

However, the dividend hike and the commitment to a high post-2011 payout are aggressive expressions of confidence in the underlying fundamentals of the storage-and-transport business. Like others in the industry, Inter Pipeline benefits from the predictability of a business built on fee-based contracts; generally speaking, it and others like it aren’t subject to commodity-price risk. If you can get the traded executed, Inter Pipeline Fund is a buy up to USD10.

Information Technology

Rogers Communications (TSX: RCI-B, NYSE: RCI) has enjoyed its dominance of the Canadian smart phone market; for a time it sold both Research in Motion’s (TSX: RIM, NSDQ: RIMM) and Apple’s (NSDQ: AAPL) iPhone with no competition. That cushy scenario will soon change; next month BCE (TSX: BCE) and Telus (TSX: T, NYSE: TU) will complete joint upgrades to their networks that will allow them to begin selling the iPhone. This will certainly impact Rogers’ subscriber growth.

Total revenue for the third quarter rose to CAD3 billion from C$2.9 billion, though net income fell to CAD485 million from CAD495 million a year ago earlier. New customer additions declined from a year ago, but the three months ended Sept. 30, 2008, marked the first quarter of iPhone sales for Rogers.

Rogers activated more than 370,000 smart phones in the quarter, and about 45 percent of those activations were new subscribers. The company added 167,000 new postpaid subscribers, the best kind for wireless service providers. That was down from 191,000 a year earlier, when Rogers launched the iPhone.

Subscribers with smart phones now represent about 28 percent of the overall postpaid subscriber base, up from 15 percent a year earlier. Average monthly revenue per postpaid wireless user fell to CAD76.79 from CAD78.60, a direct reflection of consumer thrift during a weak economy.

Data revenue jumped 46 percent in the quarter. Cable revenue, which includes Internet and home phone service, rose to CAD773 million from CAD724 million a year earlier. Rogers Communications is a hold.

Shaw Communications (TSX: SJR-B, NYSE: SJR), Canada’s second largest cable television provider, reported results for the three months and fiscal year ended Aug. 31, 2009.

Revenue for the quarter was up 8 percent year-over-year to CAD873 million, while net income was down from CAD124 million from CAD13 2 million. For the year, Shaw posted revenue of CAD3.39 billion, up 9.2 percent, and a profit of CAD535 million, down from CAD672 million in 2008.

Shaw also announced that its CAD300 million purchase of Ontario-based cable provider Mountain Cablevision has received regulatory approval. Mountain brings 41,000 cable customers, 29,000 internet subscribers and 30,000 digital phone lines to the Shaw roster.

The company lost about 5,000 Internet customers, 4,500 direct-to-home satellite customers, and almost 9,000 phone customers. The digital cable subscriber base grew by 110,501 during the quarter, up from 23,020 in the same period last year. The number of new digital subscribers has more than doubled in 2009 to 388,517 from 143,180. Shaw Communications is a buy up to USD20.

Financial Services

CI Financial (TSX: CIX, OTC: CIFAF) has reached an agreement to sell its Blackmont Capital unit to Macquarie Group (Australia: MQG, OTC: MQBKY) for CAD93.3 million in cash. Hold CI Financial.

Transports

Canadian National Railway (TSX: CNR, NYSE: CNI) reported third quarter net income of CAD461 million (CAD0.97 per share), down from CAD552 million (CAD1.16 per share) a year ago. Revenue declined 18 percent to CAD1.8 billion, total carloads declined 15 percent, and revenue ton-miles declined 11 percent. Operating expenses declined 18 percent to CAD1.2 billion on lower fuel costs and cost-cutting.

Operating income declined 18 percent, while the operating ratio was essentially flat at 62.7 percent. Nine-month 2009 free cash flow increased to CAD657 million from CAD483 million during the comparable 2008 period.

Although revenue ton-miles declined 11 percent, this represents a sequential improvement over the 14 percent decline recorded during the three months ended June 30, 2009. Canadian National Railway is a buy up to USD55.