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PNM Resources’ (PNM) CEO Pat Vincent-Collawn on 2016 Earnings Guidance Conference – Call Transcript

PNM Resources Inc. (NYSE: PNM ) 2016 Earnings Guidance Conference Call December 18, 2015 11:00 AM ET Executives Jimmie Blotter – Director-Investor Relations Pat Vincent-Collawn – Chairman, President and Chief Executive Officer Chuck Eldred – Executive Vice President and Chief Financial Officer Analysts Brian Russo – Ladenburg Thalmann Anthony Crowdell – Jefferies Leon Dubov – Luminus Management Tim Winter – Gabelli & Company Operator Good morning, and welcome to the PNM Resources 2016 Earnings Guidance Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jimmie Blotter, Director of Investor Relations. Please go ahead. Jimmie Blotter Thank you, Laura and thank you everyone for joining us this morning for the PNM Resources 2016 earnings guidance conference call. Please note that the presentation for this conference call and other supporting documents are available on our website at pnmresources.com. Joining me today are PNM Resources Chairman, President and CEO, Pat Vincent-Collawn and Chuck Eldred, our Executive Vice President and Chief Financial Officer. As well as several other members of our Executive Management team. Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements, pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update this information. For a detailed discussion of factors affecting PNM Resources results. Please refer to our current and future Annual reports on Form 10-K, Quarterly Reports on Form 10-Q, as well as reports on Form 8-K filed with the SEC. With that, I will turn the call over to Pat. Pat Vincent-Collawn Thank you, Jimmie and good morning, everyone. I hope you all are having a wonderful holiday season. As we approach the end of this very busy and successful year, it’s time to look ahead and provide our earnings guidance for 2016. But first I would like to talk about our most recent and very important news, the New Mexico Public Regulation Commission approval of BART that we’ve received earlier this week. Let’s start on Slide four. I’m very pleased to say that on December 16, the PRC formally approved our plans for the San Juan generating station. This ruling comes almost exactly two years after our initial filing with the commission. We knew that this plan was the best for our customers, for the company, for the state as a whole and the environment. It also paves the way for New Mexico’s compliance with the Clean Power Plan. Now we can move forward with implementation. I would like to congratulate and say the PNM team that has worked tirelessly on BART. This has been a long and challenging process and I am proud of the people, who are responsible for bringing it to a successful conclusion. I would also like to acknowledge and thank the other folks that have been involved including Governor Martinez and her office, various community and business groups. The Navajo Nation, the EPA and many of our interveners who have involved – have been involved extensively for years now. BART has been an all consuming task for many people for quite sometime and I am thankful to see the Commission support, the settlement agreement that we presented to them. We will now move forward with plans to retire Units 2 and 3 at the end of 2017. And we will replace the power with the mix of resources we’ve proposed, which is an additional 132 megawatts from San Juan Unit 4, and additional 134 megawatts from Palo Verde Unit 3, 40 megawatts of solar for which construction is almost complete and a gas peaking plant to be built on the San Juan site. The New Mexico Commission approval was a critical milestone in completing this process. In addition, we need FERC approval on the 203 filing. And we have asked for that to be done before year end. The approval we need is at a staff level. So it does not need to be addressed by commissioners in an open meeting. Once all of the regulatory approvals are received the sale of the mine can be completed. And we will be able to enact the new coal contract and the ownership restructuring agreement for San Juan, which together brings significant savings for our customers. And finally the SNCR equipment has been installed on San Juan Unit 1 and 4 and is expected to be fully operational next month. We will recover the cost of the equipment in the rate case that is currently pending before the commission. That case also includes a previously approved 40 megawatts of solar replacement power. The remaining items related to the BART settlement will be included in the 2018 rate case, which we expect to file in December of 2016. I want to emphasize that the implementation of the BART plan combined with the significant investments we have already made position San Juan for continued operation into the future while meeting and in many cases exceeding environmental regulations. Emissions from BART will put the plant in compliance with the haze regulation and place New Mexico in good shape to comply with the Clean Power Plan. The environmental upgrades we have made between 2006 and 2009 and the installation of the BART result in significant reductions as several emission including a 78% reduction in NOx and 87% reduction in SO2 and 85% reduction in particular matter emissions. In addition the plant has a 99.5% removal efficiency for mercury. Balanced draft will assist the plant in complying with the National Ambient Air Quality Standards by eliminating fugitive emissions of NOx, SO2, mercury and other pollutants. Coal ash at San Juan is dry handled and returned to the former surface mine pit for reclamation. There are no wet coal ash storage ponds or pipes transporting coal ash. Regarding 316(b), San Juan uses the closed cycle cooling systems and is thus well situated to comply with the rule. EPA’s final stream effluent guidelines rule, that was issued earlier this year is expected to have minimum impact on San Juan since it is a zero discharge facility. So the bottom line, we know of no existing, or anticipated environmental regulations that would reduce the viability of our plants going forward. Let’s now move to Slide 5. Looking forward, we continue to focus our strategic financial goals of earning our authorized returns, maintaining investment grade credit ratings and providing above average industry earnings and dividend growth. We remain on track with our earnings growth call, you can see that our 2016 guidance range of $1.55 to $1.76 continues along our 7% to 9% growth trajectory. I’m pleased to say that TNMP is expected to continue to perform well driven by increased loads and recovery of our transmission investments. PNM had a challenging start to 2015 in the regulatory environment, but we’re back on track. The re-file rate case is proceeding as expected. Rate should be effect in the third quarter of 2016. From a customer perspective, when you net the fuel and other savings against the rate request, the overall impact to customer bills is only 5.4%. Over the last few years, we have implemented companywide efforts to strengthen relationship with customers and to improve their experiences with PNM. Despite the challenges we continue to face, we have achieved company record high levels of customer satisfaction. Another regulatory challenge this year was related to the definition of the future test year. Now that the commission has modified its interpretation of the future test to a definition to make it consistent with the statue, there is no longer a need to continue the appeal we filed in the state Supreme Court. We will be taking step to conclude that matter in the next month or so. And obviously, the PRC approval of BART lays the ground work for our 2018 rate case. If you turn to Slide 6, will give you an update on the dividend. As you saw last week, the Board increased the annual dividend by 10%. This makes the annualized dividend $0.88. We continue to target our 50% to 60% payout ratio. The Board will continue to review the dividend each year, and in the near-term we expect continued above average increases. Once we are through our heightened CapEx period, the Board may consider increasing the 50% to 60% payout ratio to bring it more inline with the industry. Now, I’ll turn it over to Chuck Eldred, our Chief Financial Officer for a closer look at the numbers. Chuck Eldred Thank you, Pat and good morning everyone. 2016 will be a transitional year for the Company. We have much for the uncertainty behind us now with the PRC approval of the BART plan, and going forward our regulatory filings at PNM should be focused on recovery of the investments that are required to prudently run our business. At TNMP, we continue to see low growth, and we’ll continue to make prudent investments to support the reliability of that business. Now let’s go to the details of 2016 guidance beginning on Slide 8. On this Slide, we compare the previously issued 2016 earnings potential to the 2016 guidance we’re issuing today. As you can see the ranges between earnings potential and guidance are similar. But there are adjustments to the individual items as you move away from the rate base math that the earnings potential is based on. Beginning with PNM retail, 2016 guidance is at $1.08 to $1.24. This is a slight adjustment to the earnings potential view. The expectations shown here reflects the full ask and varies depending on the implementation date between July 1 and October 1. I’ll provide you with some information to help you make your own assumptions on the rate case in a moment. In addition to the rate case, PNM retail will also be affected by other drivers. For example, regulatory lag for the first portion of the year and load, which we continue to forecast conservatively. Next is renewables at $0.06. This is inline with the earnings potential previously shared. Per transition earnings potential showed a range of $0.08 to $0.10, but we’re guiding this business to be $0.09 to $0.10. The tightened range is based on our forecast for 2016. However unit three is fully hedged for 2016 and we have updated the guidance for the prices we expect to see. Items not in rates is expected to be inline with the midpoint of 2015 at $0.03 to $0.04. This brings total PNM to $1.12 to $1.30. Santa Fe continues to be an example of what the differences between our earnings potential and guidance. Santa Fe is expected to continue to have key cost filings and strong load growth. Therefore guidance is $0.49 to $0.51, which is above their earnings potential, but slightly lower than the 2015 midpoint. Corporate and other is also a little higher than the earnings potential that we have discussed with benefits in 2016 provided by the retirement of the 9.25% debt in 2015 and the restructuring agreement in the San Juan. That brings the total range of 2016 to $1.55 to $1.76. Once we have the rate case finalized, we’ll be able to provide an updated guidance range for you. Now turning to Slide 9, we continue to see positive movement in Albuquerque’s employment growth, outpacing the state in New Mexico and getting closer to the U.S. rate. We also continue to forecast customer growth at PNM at 0.5%. We’re forecasting low growth at a range of flat to down 2%, while we see signs of the economy continues to stabilize, we do not see enough growth to counterbalance the effects of energy efficiency. Now turning to Slide 10, I walk through the assumptions related to PNM’s general rate case in 2016. As you remember, we filed for $123.5 million increase based on a 10.5% ROE. Implementation of this full request on July 1 would increase PNM’s EPS by $0.40. A 25 basis points difference in the ROE would impact EPS by $0.04 on an annualized basis. Implementation of full request after July 1st would also reduce the amount in 2016. There you can see some sensitivities around the effect of delays in the rate implementation would have on our 2016 EPS. As a reminder, key dates upcoming for the rate case includes staff and intervener testimony due at the end of January, rebuttal testimony due in February, and hearings in March. It’s our objective to stay on the current schedule with this case. Now turning to Slide 11, it reflects the rest of PNM’s assumption for 2016 compared to 2015. The purchase of the 64 megawatts of Palo Verde Unit 2 leases in January were increased earnings by $0.12. This represents a full year impact of the eliminated O&M costs for the actual lease expense, partially offset by increased depreciation and interest expense tied to the purchase. Weather has lowered PNM EPS in 2015 by $0.03 through the third quarter. So we’d assume an increase to get us back to normal weather for 2016. O&M cost associated with the outages should be lower in 2016 by up to $0.02 as we’ve gotten through some major outages at San Juan for the installation of the SNCRs. The outage schedule is in the appendix. Palo Verde Unit 3 earnings are expected to come in $0.12 lower than 2015 as market prices continue to be depressed. These sales are fully hedged for 2016 at an average around the clock price at $26 per megawatt hour. Since Palo Verde 3 will serve the New Mexico retail customers beginning in 2018, we’re not able to sell that power for this asset under the long-term contract, so we’ll be able to – we’ll be exposed to the lower price levels in the meantime. As I mentioned earlier, we have projected low growth at the range of flat to down $0.02 with each percentage point equals a $0.05 of earnings. Also reducing earnings in 2016 is lower AFUDC as our capital spending level comes down from 2015 peak that was in our capital plan. In addition to the 2016 total capital being lowered, $164 million is for the Palo Verde 2 lease purchase. This capital will not earn AFUDC as the asset is already constructed. Depreciation and property tax are expected to increase $0.04 to $0.06 as a result of the capital that is placed into service. Interest expense should be higher in 2016 due to the $250 million of long-term debt that we issued in August of this year. On the third quarter earnings call, I talked about how the FERC Generation and Navopache contract will begin to face out in 2016, reduced in earnings by $0.03 that you can see here. Also you’ll remember that we saw a pickup in 2015 of $0.03 related to the one-time El Paso Natural Gas FERC tariff refund. This will not occur in 2016. Finally, revenue from our renewable rate rider is expected to decline in 2016 as our renewable rate base deprecates. You’ll remember that we added 40 megawatts of solar in 2015, but we have included this in our general rate case and it’s not part of the rider. One item that is typically a driver for us that you do not see on this list that the impact of the Palo Verde Nuclear Decommissioning Trust gains. That’s because the gains are expected to be similar to 2015. As we continue to position the Unit 3 portion of the trust for addition to retail rate base in 2016, you can find an assumption on this item as well as our usual breakdown of quarterly EPS for the company in the appendix. Now let’s turn to TNMP beginning on Slide 12. We continue to see strong growth within this business segment. While employment growth in Houston has decreased from a year-ago, it continues to be positive measure and Dallas continues to outpace the State of Texas in the United States. Keep in mind, the Dallas area accounts for nearly 40% of TNMP’s revenues, while the Houston area accounts for approximately 50% and West Texas makes up less than 10%. I want to note that the West Texas portion of the TNMP’s territory is the Permian Basin. Although the area has been more exposed to oil prices and drilling is down, their production is up. And as a result, we have not seen a reduction in our load. TNMP residential customer growth is forecasted at 1% again for 2016, and overall load is also again projected to increase between 2% and 3%. Now let’s turn to TNMP’s full earnings guidance and drivers on Slide 13. Once again we expect to implement two TCOS increases during the year. We expect to make those filings in January and July with implementation in March and September respectively, adding $0.03 to $0.04 to EPS. We are projecting the load increase of 2% to 3%, which increases earnings by $0.01 per each percentage point. We expect to see O&M to be flat to an increase, this results in drivers that are zero to negative $0.02. We continue to make capital investments to support the growth in our service territory, which leads to increase depreciation of property taxes that we’ve forecasted at $0.02 to $0.03. A portion of these cost related to transition assets which is about 40% of capital are recovered through TCOS filings. Interest expense also rises in 2016, this is in fact of issuing the long-term debt. Next let’s review some of the changes we’re seeing in the corporate and other segment on Slide 14. Well, I know that you’re all familiar with a retirement of our 9.25% debt in 2015, and the associated increase in short-term debt levels. I also want to remind you that San Juan restructuring agreement is expected to go and effect in January 2016, and if the demand charges paid to PNM Resources from the existing parties related to the additional 65 megawatts at Unit 4 is part of corporate and other segment, until it is moved to PNM which will likely occur at the end of 2017. This will result in $0.01 improvement to earnings in 2016. Therefore in total, we expect the corporate and other segment to improve slightly over 2015. So now let’s review some detail on how we’re investing at the business and what that means for earnings beyond 2016. So wrapping up on Slide 15, you can see the earnings potential for each of the remaining years for 2019, our view is consistent with our earnings target of 7% to 9% growth for that time period, and it’s consistent with the numbers that we have seen before. We continue to execute on our current plan to maximize the earnings potential that we can realize in our business by focusing on regulatory outcomes and earning our authorized returns. Now I’ll turn it back over to Pat. Thank you. Pat Vincent-Collawn Thanks, Chuck. We’re focused on execution, we’ve remain committed to achieving constructive regulatory outcomes, maintaining operational excellence, improving customer satisfaction, and running the business efficiently. We’re now happy to take questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] And our next question will come from Brian Russo of Ladenburg Thalmann. Brian Russo Hi, good morning. Pat Vincent-Collawn Good morning, Brian. Chuck Eldred Good morning, Brian. Brian Russo Just Chuck to clarify on PV3 is it completely unhedged in 2017? Chuck Eldred Yes, we – it’s not hedged in 2017 at this point. We typically try to hedge in our rolling 12 month basis and obviously with prices as low as they are. We would like to think that there would be some anticipation or some improvement in 2017, but it’s just too hard to predict. So we’re really on the downside of the lower gas prices and hedging that asset and – but it’s fully hedged in 2016. And that as a result of the lower prices that we’re able to hedge in 2016 resulting into the $0.12 hit… Brian Russo Got it, understood. And then how does the sales assumption in the current rate case of PNM electric compare with your flat to negative 2% outlook assumption for 2016? Pat Vincent-Collawn I’m sorry Brian, would you give us the question again. Brian Russo Yes, just the sales assumption in current rate case filing. How does that compare with your actual outlook for 2016? Chuck Eldred Brian, it’s really – the final would be more flat to what we expect over 2015, but again we’re going to be conservative because we just don’t see enough consistency in the trends to give us comfort to think it would be any better than that and we’re going to continue to be a little more pessimistic on the – thinking about the downside effect of that on a continuous basis. And then address that, and there’s a rate case it’s pending right now. Brian Russo Okay, great. Thank you. Pat Vincent-Collawn Thanks Brian. Operator And the next question comes from Anthony Crowdell of Jefferies. Anthony Crowdell Good morning. Chuck Eldred Good morning. Pat Vincent-Collawn Hi, good morning, Anthony. Anthony Crowdell Just one housekeeping question and something else I think you had said, when do you expect to file the 2018 general rate case? Pat Vincent-Collawn In December of 2016. Anthony Crowdell Got it, okay. And then – and I guess just lastly, if you look at 2015 your regulatory calendar was very busy we had future test years, BART we had settlements I guess people pull out everything else. It looks like things have maybe cleared or maybe a little easier in 2016. I guess my question is has all the emotion that went on in 2015 poisoned the well that when we look at the 2016 rate proceeding going on and then you’re going to file again in December of 2016 for the 2018 case, has all that emotion poisoned the well in the next couple of rate proceedings. Pat Vincent-Collawn I don’t think so Anthony I think that given the fact that we’ve remained constructive throughout the whole 2015 rate case and we’re willing to go back and work with the interveners. I think they’ve really appreciated that and I think the commission even said at the hearing that they appreciated everybody’s positive attitude and working towards the settlement obviously we had one party that did not join that settlement or a couple of parties that didn’t join that settlement. But I think everybody understands that we remain positive, we stay positive, that this was the most complicated case ever to be seen in New Mexico and now we’re kind of back to much more plain-vanilla rate cases. So I don’t think that, that anything got poisoned I think that the way the company and the employees handled itself was very good. Anthony Crowdell And just lastly, the BART proceeding, I think the BART was like – I believe 4 to 1 do you know the last time the commission unanimously approved something? Pat Vincent-Collawn Anthony, we have to get back to you on that for certain, there have been some smaller things the commission has unanimously approved in terms of some riders. I think they unanimously approved opening a workshop and something, so I don’t know off the top of my head, but we will get back to you. And when commissioners have voted against, there have actually been different commissioners voting differently, there was about yesterday for example, some of the folks wanted more time on the SPF rate case and the commissioner said no – it was 4 to 1 but it was commissioner Montoya voting against that as opposed to commissioner Espinoza who voted against the BART proceeding. So it’s been a different mix of commissioners voting, but… Chuck Eldred I think some of the smaller items… Pat Vincent-Collawn Yes. Chuck Eldred Solar at 40 megawatts the delta purchase, which we called the Rio Bravo generating station. There has been a lot of smaller projects throughout the proceedings over the last year that are included in the 2016 rate case that have been approved that have been supported by the commission. So, but, we can go back and give you some answers and details. Anthony Crowdell Thanks and… Pat Vincent-Collawn The future test year unchanged, Anthony when the commission decided to go with the definition that we and SPF had advocated that was unanimous. Anthony Crowdell Okay, great. Thanks for taking my question and enjoy the holidays. Pat Vincent-Collawn Thanks, Anthony, you too. Chuck Eldred Thank you. Operator [Operator Instructions] Our next question comes from Leon Dubov of Luminus Management. Leon Dubov Hi guys, good morning. Pat Vincent-Collawn Good morning, Leon. Chuck Eldred Good morning. Leon Dubov I just want to make sure I understand the assumptions for the rate case that you are having guidance. So if I look at the Slide 8 or the PNM Retail, $1.08 to $1.24, you said that includes the full implementation of – your full ask for the rate case? Chuck Eldred That’s a full ask use in the July 1 and the October 1, and then we’ve adjusted it for load in some of the regulatory lag to reflect that… Leon Dubov So again, this assumes full ask with… Chuck Eldred Full ask, yes… Leon Dubov Or the different implementation dates that’s what make the difference? Chuck Eldred That’s correct. Pat Vincent-Collawn Correct. Leon Dubov Okay. And then I can use that with the sensitivities you gave on the Slide 10, so effectively if we got in August first implementation date, it would be $0.08 off the top end, is that the right way to read that? Chuck Eldred That’s correct. Yes. Leon Dubov Okay. Got, it. Thank you, I just wanted to … Chuck Eldred And again I want to answer that. We are focusing very, very intently on the July 1 date. So the schedule we have out there is, our objective is not to – from our standpoint have any alteration to that timing. Leon Dubov Thank you. Pat Vincent-Collawn Thanks Leon. Operator And next we have a question from Tim Winter of Gabelli & Company. Tim Winter Good morning, and congratulations on getting all of this approved. The BART approval and the test year. Pat Vincent-Collawn Good morning, and thank you, Tim. Tim Winter You should see if Jimmy and Chuck, will let you take a vacation anytime soon. Pat Vincent-Collawn Actually I canceled my vacation to be here today Tim. So, but maybe next year they’ll let me have one. Tim Winter I was wondering if you could talk a little bit about the future test year procedures. Do you have, basically all the procedures and processes setting out to file for that or do you still need to do some more work with the commission? Pat Vincent-Collawn Well, we need to go ahead and take back the appeal at the Supreme Court and finalize that. But in terms of hours we practice this so we now have that in this rate case. That we have under right now, while it is not a future test year we worked through with the staff and interveners to make sure we had the models and the data in a way that they felt was complete. So between that and the fact that we’ve done it before and that SPS has done this before. We feel we’re in good shape to file the one in December of next year. Tim Winter Okay, great. Thank you. Pat Vincent-Collawn Jim, if I need some help getting a vacation next year. Can I call you? Tim Winter Absolutely. Pat Vincent-Collawn Great, thank you. Tim Winter Thanks for having the call. Pat Vincent-Collawn Thanks, Tim. Operator And this concludes our question-and-answer session. I would like to turn the conference back over to Pat Vincent-Collawn for any closing remarks. Pat Vincent-Collawn That’s okay. Thank you all for joining us. I know it’s a busy holiday season for everyone. We’ve had a good year here at PNM. Resources and again I just want to thank everybody at the company and the community and the Governor’s office at the Navajo Nation that worked with us to bring the BART plant to a fruition. I hope you all have a wonderful, safe and happy holiday season. I look forward to seeing you all in the New Year. Thank you. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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A Stock Market Breather Before A Big-Time Bullish Breakout? Not Bloody Likely

It is unsettling to deal with the probability that we are closer to a bearish decline in stocks than a bullish reboot. However, if one prepares for inevitable depreciation in overvalued asset prices, buying low becomes less intimidating. At the current moment, far too many folks are being led astray by talking points they hear on CNBC and Bloomberg. History and probability do not favor the idea that stock markets will magically grind higher. It is unsettling to deal with the probability that we are closer to a bearish decline in stocks than a bullish reboot. Investment account values will wane. Household net worth will diminish. And when stock prices near their lowest ebb, the typical investor will decide that buying is impractical. However, if one prepares for inevitable depreciation in overvalued asset prices, buying low becomes less intimidating. For example, in spite of the exceptionally poor rap that trend-following techniques receive from the mainstream financial media, a decision to “stand down” when the 50-day crossed below the 200-day in the previous stock bear provided a remarkably desirable return OF capital. A subsequent decision to embrace risk when the 50-day crossed above the 200-day provided a remarkably desirable entry point for a return ON capital. Selling the S&P 500 near 1500 (a.k.a. “selling high”) and purchasing it again near 900 (a.k.a. “buying low”) helped one successfully transition from capital preservation to capital appreciation. At the current moment, far too many folks are being led astray by talking points they hear on CNBC and Bloomberg. For instance, popular shows regularly trot out analysts who insist that that market is “grinding higher.” First of all, which market is grinding higher? The Dow Industrials, Dow Transports, S&P 500, S&P 400, Russell 2000 and New York Stock Exchange (NYSE) Composite are all lower than they were one year ago. (Note: Ironically enough, the Fed’s last asset purchase actually occurred on 12/18/2014, making 12/17/2015 the end of a full trading year.) It follows that the only significant U.S. index that has made genuine progress since the end of the Federal Reserve’s quantitative easing (QE3) is the NASDAQ . Even there, progress is less impressive when one weights the components of the NASDAQ equally, rather than rely on the super-sized weightings of Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ) and Alphabet (NASDAQ: GOOG ). This is evident in the deterioration of the First Trust NASDAQ-100 Equal Weight Index ETF (NASDAQ: QQEW ):the PowerShares QQQ Trust ETF (NASDAQ: QQQ ) price ratio. Why is the lack of meaningful progress in so many U.S. stock barometers – the Dow Industrials, Dow Transports, S&P 500, S&P 400, Russell 2000, NYSE Composite – being overlooked? The most common answer that I am hearing is the prospect of a “breather.” A proverbial “pause” for U.S. stocks in the middle of a bullish cycle. The problems with the “breather” belief are numerous. For one thing, where consolidation has occurred during previous “pauses,” the number of advancing stocks on the exchanges relative to the the number of declining issues usually move higher. Consider the euro-zone crisis in the summertime of 2011 – the last time stocks experienced anything close to a sharp correction. The NYSE Advance/Decline Line (A/D) offered ample signs of a healthier stock market with a series of “higher lows” and “higher highs.” In essence, the number of advancers began to eviscerate the number of decliners. If one is inclined to believe that the current stock bull is merely catching its breath for a second wind, shouldn’t we see the same kind of improving breadth here in 2015? Like we did in 2011? Yet, over the past year, more stocks in the US have been declining than advancing for the first time since 2009. Moreover, the NYSE A/D Line is not currently demonstrating the kind of resilience that previous bullish rallies demonstrated. A second shot across the “breather” bow is the earnings environment. Combine the strong dollar, low commodity prices, higher borrowing costs, and we’re about to see our third consecutive quarterly decline in S&P 500 earnings. That has not occurred since the systemic financial collapse. What’s more, the profitability concerns are wreaking havoc on traditional valuations; that is, you cannot see a 14% decline in year-over-year earnings , as well as a third consecutive quarter of earnings deterioration, and anticipate anything other than expensive stocks becoming even pricier. A third dilemma for the “breather” believers? The rest of the world’s stock markets are trading near the levels they were trading when the S&P 500 hit 1867 back in August. Or worse. Many of the world markets are trading at even lower prices than the August lows for the S&P 500 . How about the world’s 4th largest economy in the United Kingdom? The i Shares MSCI United Kingdom ETF (NYSEARCA: EWU ) is far beneath its 200-day moving average and hardly shows any indication that it is ready to rally back to new 52 -week highs. Of course, history only rhymes, it does not repeat. There’s no way to know what will transpire with any certainty. Yet history and probability do not favor the idea that stock markets will magically grind higher. (They haven’t for the last year.) History and probability do not favor a bullish breakout to new records when manufacturing is contracting, earnings and sales are declining, and global economic hardships are increasing. Here is one final item to digest. Several years ago, the U.S. Department of Transportation’s Bureau of Transportation Statistics produced a study that showed how its transportation index “…led slowdowns in the economy by an average of four to five months.” Is there anything in the activity of a similar index – the longest running stock index in U.S. history, the Dow Jones Transportation Index – that suggests U.S. stocks are gearing up for a breakout above all-time highs? Does a 17.25% price drop show that stocks are grinding higher or lower? Keep a little cash on hand. Not only will it help you sleep better at night, but it will give you the confidence to buy good stuff lower down the road. D isclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Ian Ball: Above-Average Capital Allocation Yields Above-Average Results In Mining

Strategies for capital allocation. Where are the bottlenecks in mine efficiency? Beware of excessive share dilution in mining stocks. Companies seeking capital meet potential financiers via the internet. Ian Ball brings us Abitibi Royalty Search, an online platform where mining companies in need of financing can easily submit geological data on their projects for consideration. In the mining sector, above-average capital allocation yields above-average results. The bottleneck in efficiency is in equipment provider innovation. Ian sheds light on our current position in the commodity market cycle, he expects the bottom within 12 months and his investment strategies reflect this. He advises to beware of share dilution in mining companies and not just opt for the cheapies. Ian Ball was appointed president of Abitibi Royalties ( OTC:ATBYF ) in 2014. Ian worked 10.5 years for Rob McEwen, initially at Goldcorp (NYSE: GG ) and then McEwen Mining (NYSE: MUX ). He most recently served as McEwen Mining’s president where he was responsible for overseeing production, construction and exploration activities throughout North and South America. He was responsible for discovering McEwen Mining’s El Gallo 2 project, scheduled to become one of the 15 largest silver mines in the world and building the El Gallo 1 gold mine that is forecasted to produce 75,000 ounces gold in 2015. www.youtube.com/watch Palisade Radio Host, Collin Kettell : Welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. On the line with us today is a new guest to the program. I am very happy to have him. It is Ian Ball, President and CEO of Abitibi Royalties. A lot of people are probably familiar with the name as he has been around in the industry for quite some time and he has worked in the past – and still does to this day – with Rob McEwen. Ian, welcome to the program. President and CEO, Abitibi Royalties, Ian Ball: Thank you for having me today. CK: Yeah, as we were talking before the interview here, you went through your background that got you into mining. I thought I had started young, but you were saying that your background in mining went all the way back to when you were five years old. If you do not mind just giving a brief overview of that story again, it would be great. IB: Yeah, I would be delighted to. I grew up with mining because my parents were investors in mostly junior mining companies, and they had me looking at mining stocks at the age of five. There is always a discussion around the dinner room table on gold mining, exploration success, and the amount of wealth that it could generate on the back of discovery, so it has always been very intriguing for me. As I sort of went through school, I became very intrigued also in terms of how different mining companies were run and it seemed to me it was quite clear that the best mining company in terms of its management, in terms of its assets was Goldcorp. This was back in 2002, 2003. I was very fortunate to have met Rob McEwen at that time and then have him offer me a job to go and work there. CK: And so from therein you became the president of McEwen Mining, if you can give a brief overview of your time there and what you are doing now. IB: Sure. Well, after Goldcorp, because if you think back to 2005, Goldcorp merged with Wheaton River and the head office was then subsequently moved to Vancouver. Rob stepped down as CEO, which was always his intention. We went out and started a small company called US Gold which then became McEwen Mining. I had started at US Gold and slowly started to move into the exploration’s operational side and started in Mexico with a small exploration budget. We were fortunate enough to make a reasonable size silver discovery that now has almost a construction permit and is scheduled to be one of the fifteen largest silver mines in the world. On the back of that headed up a team that built what is now McEwen Mining, the main operating act of the El Gallo 1 Mine in Mexico. With those two successes then being promoted to president of McEwen Mining and that will have to be about ten years. CK: Great! So now you are working with Abitibi Royalty. I think a lot of our listeners have seen many of the press releases you guys have been doing, what you are calling a royalty search over the past few months. But, essentially, if you kind of outline the concept for potential shareholders behind how you guys see making money. It is quite a unique business model that I do not think has been executed on before. IB: Well, we look at Abitibi as having almost like a number of divisions inside of a company. Number 1 is the royalty search. If you think of any job of the CEO, it is allocation of capital. In a mining company, we have done an absolutely horrible job of allocating capital. When I was working at Goldcorp and then McEwen Mining, what become Rob’s primary themes is that if you do the average you should expect to get the average result. Most mining companies view the same as everybody else. That is why it is mostly we are all in the same position. When I look at the world in terms of mining, oftentimes it is not large sums of capital that generate the highest return; usually it is small sums deployed in a different fashion. We looked at it and said, well, it is a tough market right now. There are a lot of prospectors and junior mining companies that are having a difficult time in terms of financial position. They cannot pay the claim fees that are coming due and, therefore, they are going to have to drop the properties. Then I say, well, would we be willing to pay the property taxes on their behalf, in doing so getting back a royalty? We have also asked that should the properties be sold we would also get 15% of the net proceeds. But we are looking for properties that have certain characteristic. They have to be near a mine site. They have to have good geology and they have to have science and mineralization through previous exploration. I thought if we could build up a portfolio of 25 to 30 of these, we might walk away with two that end up being successful. Today, we have 70+ submissions. We completed eight transactions and we are continuing to review submissions as they come in. We have been pretty happy with what we spent. Today, I think for the first eight we spent $90,000. CK: I want to dig in a little bit deeper on this model behind paying for the claims fees and in turn getting a royalty and some upside on the project. The purest form of speculating in the mining sector is picking up or staking projects and holding them from the cheap point of a bear market into the craze that comes into a bull market, and that is essentially what you guys are doing. I mean I have looked at some of the press releases coming out and the costs to cover these claims fees are quite low and you are ending up with a substantial royalty. But for our listeners that are not as familiar, what is the value of the royalty? I mean some of these assets are not going to become a mine, and even if two of them do it, it is going to be a long time out. If you can explain how these things become valuable just through a bull market emerging that would be great. IB: Well, if you look at some of the royalties that we acquire, couple of them are 200 meters away from an operating mine. They are very, very close. A lot of the geology indicates that the mineralization may trend over where we have the royalty. You are right where even if there is a discovery it could be some time before you see cash flow. But if you look at the industry in the history of mining, the history of royalties, the best royalty ever purchased was by Franco-Nevada (NYSE: FNV ) in the early to mid-’80s on the Goldstrike mine, and that was when Barrick (NYSE: ABX ) then subsequently made the large discovery just like Goldstrike. If you look at Franco, it was not so much the cash flow that was the driver of their share price; it was the exploration success in knowing that cash flows were coming in the future. I think that this way, if the exploration company has a good drill hole, their share price starts to increase because you are building the underlying value. We suspected the same thing would happen initially here as any of these properties was to have a resource, and the value would have continually be increased as they get closer to production. The thing that we like most about these is that they are all right near a mine site and these are not in an area that has no infrastructure. They are 200 meters away, 500 meters away, a kilometer away from where usually substantial mines are operating. CK: For the benefit of our audience, Ian, can you explain how royalty is tied to a project? When a royalty goes away? How it sticks with the projects as long as the project remains in good standing, etc.? IB: Yeah. In that sense, it is a good question because royalties, in terms of their legal standing, they do vary by jurisdiction. You have to know the underlying rules that are applicable. Ontario, for example, in Canada is different than in Quebec. It might seem strange that you are on the same country but one is common law, one is civil law. The rules do change. One thing that we are building into our agreement is saying that once the claims come due again we are putting in a clause that we will be willing to pay the claim fees again for a higher royalty. That is where we can maintain if we like the property that it shows it stays in good standing and does not go to any default status. CK: Okay, thank you for the clarification there. I want to shift gears a little bit and talk to you about the industry that we are in which is, oftentimes, as you pointed out, mismanaged, money is misallocated. Much of your career was started at Goldcorp, and you said that at the time it was extremely innovative, shareholder-friendly. Of course, there was what I believe was referred to as the “Challenge” which was that first online exploration challenge that was a huge success and has now been replicated a few different times. Can you talk about the use of technology and the internet in how you have gone ahead and worked in the mining sector? IB: Well, I think the internet has a lot of uses in terms of its reach to connect people, to bring in new ideas. You did see it with the Goldcorp Challenge. You have to remember that was back in 2000 when the internet really was at the early stage and what you are able to do today versus then has obviously been drastically increased, so there is more we can be doing on the internet. If you think about it other companies have tried it and there is always success. Barrick would be an example where they had a challenge on metallurgy. This was in 2006 where they put up a prize of $10,000,000 I believe it was. But I think the problem there was they did not have an internal champion to keep pushing it ahead. I think without that a lot of these initiatives end up failing where I think Rob was a very good example where he came up with the idea, was the internal champion, and continued to push it so it became a success. I think that is the key. We have tried to use the internet saying that rather than trying to talk to people individually about what claims they want to have in good standing. We have created an online platform where you can submit all your technical data online and you will have an answer within 48 hours. I think that is a much more efficient process. Those are just two examples. In terms of innovation technology as a whole, right now we are seeing a lot of cost cuts in the industry. But it is just cutting cost; it is not innovation. The two should not be confused. To give you an example, two years ago, I went down to the Caterpillar (NYSE: CAT ) factory in Illinois and my question was why are we not developing an electric coal truck? Because according to the work that I had done, mining cost would go from – and this is in Mexico because this is where I was primarily working at the time. Mining cost would go from $2 a ton to $1 a ton if you can move from a diesel to an electric haul truck. I thought, “Okay, well, that would drastically impact the economics of a mining operation.” Caterpillar’s response was, “We do not do electric. We only care about expanding the hours on a diesel engine.” That is the wrong mindset for the mining industry. I think we need to push the suppliers to work harder on the innovation side. CK: Well, that is very interesting. Well, Ian, at 34 years old, you have ridden a couple cycles up and down. I want to talk about where we are at right now in the cycle. I think action speak louder than words. Certainly with you picking up assets under Abitibi and other projects you are working on, it would indicate that you think we are near a bottom. How do you see things developing over the next couple of years? Are we close? Is the bottom behind us? IB: Well, a couple of things. You are right and we launched the royalty search on the back of a very difficult time in the market. Four years ago, when we could not have done the royalty search idea because there was a lot of capital available, the other thing that we have done to sort of show that we think it is the good time to be buying is that we are one of the few companies that have launched share buyback program. Rather than issuing shares, we are buying back our shares currently. The other thing is I agreed to take all my salary in shares versus taking it in cash. That is also my belief that the share prices are going to go up, not down. In terms of where we are in the market, I think kind of pick a spot or a price in terms of where’s a bottom, I think that is a very difficult thing to do. I sort of try to look at it in terms of where are we are in the cycle. This might sound like I am looking at myself a lot as a buffer but I think we are in the bottom twenty to bottom third of this downward trend. If you look at the technicals, which I know, I am not a big believer in technicals, but if you look at the charts you would assume that gold is going to go to a thousand. It is probably going to overshoot a thousand as it typically always overshoots support to some degree. Whether it is $975, $950, $925, I think gold is going to go there somewhere in the next twelve months. Knowing that is very difficult to do deals and markets can turn around quickly. We have looked at it and see we are in the bottom third of the market that is safe enough for us to start deploying our capital, share buyback, asset acquisitions. We think in the next twelve months, we will probably see the bottom, but we do not know where that would be or we do not know how quickly we would recover from there or whether it sort of just tread water for some time. CK: What do your past experiences in bull markets tell you about the type of gains will be made for investors? Obviously, it depends on if you are going to the ground level purchasing assets like yourself or if you are buying mid-tiers or majors. But what will you expect over the next few years? IB: Well, it is an interesting question because I just sort of give you an example. If you go back to 1995, this is when Goldcorp made the high grade zone discovery at Red Lake and the shares did very well off the back of that. Then in ’96 we had Bre-X. We then had gold prices starting to decline making significant declines in ’97, and then they ultimately bought, did a double lot then in 1999 and then in 2001. By the time you got to 2001, Goldcorp, despite having arguably the best gold discovery in fifteen years, was back to the same price they were pre-discovery. If you look at it and say – in hindsight it makes sense and here you have a deposit that ends up being five million ounces of gold at 88 grams per ton gold. Think of it. That is almost unheard of. It is unheard of. Then if you have the nerve to buy at the time the gains were phenomenal going from 2001 to 2005, 2006 where the share price ultimately went from $5 in 2001 to $46. Big games can be had with the announcement of a company of reasonable size. I think that now people should be looking at companies that have good assets, good discoveries, that are trading at fractions of what it even cost to discover those deposits. I think there is a few of them out there right now. CK: Yeah, that is great. Well, Ian, at this point, I want to ask you if you have anything to add. Any suggestions for audience, members, and also if you can give us some more information on the companies you are working with where people can find out some more information that would be great. IB: Well, I would say the thing you will come to appreciate over time is that with a lot of these mining companies, you should be looking at the share dilution. I think that is what has been a killer in this industry and that the cost of capital to finance these companies was quite high, and you are looking at companies that are cheap and that is why we buy shares. But do they have any money? How long will that money take them. If they have to do a financing, how many more shares are to be issued plus the warrant? There’s a bit of a cautionary tale to be had there. In terms of other mining companies, I only invest in one and that is Abitibi. I do not invest in any others. There are specific reasons why and I think Abitibi has a good story in terms of its fundamentals. I do think that there are other companies out there that are doing good work, but it is still a bit of a cautionary tale. Right now, you have an opportunity to probably buy a handful of very good companies at a reasonable price rather than trying to buy companies that are just cheap for the sake of being cheap. CK: Okay, well, Ian, thanks so much for coming on the program. Really appreciate it. We will try and get you back on next year maybe in a better market, maybe not. IB: Okay, that sounds good. Thank you for your time today.