Equity Strategy August 25, 2006 :

Conservative Strategy:

This week is the start of the earnings releases for the third quarter by the Canadian banks and so far the quarter has started out with a bang. The financial services sector is dominated by the big five banks and the current quarterly earnings should give this sector a boost.

The Bank of Montreal (BMO) was the first out of the gate and reported a 30% increase in earnings coming in at $704 million or $1.41 per share verses $541 million or $1.08 per share in the same quarter last year. Revenue increased to $2.6 billion for the third quarter of 2006 as compared to $2.4 billion a year earlier.

The Bank of Montreal has been able to reduce the provision for loan losses dramatically this year from $400 million at the beginning of the year to only $250 million. The reduction in loan loss provision is one of the main factors enabling the bank to report increased earnings this quarter.

The problem going forward is that when the economy slows down the loan loss provision will again be increased and it will come at a time when earnings will be under pressure as well creating the potential for a dramatic turn around in the bottom line.

The TD Bank reported a dramatic turn around in earnings in the third quarter reporting a 92% increase to $790 million or $1.09 per share verses $411 million or 58 cents per share in the same quarter a year ago. The 2005 earnings were impacted by a huge provision for the settlement of Enron class action litigation.

The TD Banks retail division had a very good quarter with strong consumer and small business loan demand driving the earnings improvement for the entire bank.

The Royal Bank reported third quarter earnings today with a 20% increase to $1.18 billion or 90 cents per share as compared to $979 million or 74 cents per share for the same quarter in 2005. The Royal has definitely turned the corner in their US business which is now adding to the profitability of the bank on a regular basis after being a drag on earnings for the pervious two years even with the Canadian dollar higher over that time frame.

The CIBC and the Bank of Nova Scotia report next week and the bar has been set fairly high in regards to earnings growth, investors in these two banks will be anticipating strong growth if it doesn't materialize the shares will be pummeled by the selling.

The recent proposal by Japan to create a 16 country Asian free trade zone has been getting a little press this week. I would have thought that this type of proposal would see a little more interest from the press and politicians here in North America . The 16 countries proposed are Japan , China , India , Australia , South Korea New Zealand and the 10 members of the Association of Southeast Asian Nations (ASEAN). The ASEAN has been in place for nearly 4 decades and includes Malaysia , Indonesia , Singapore , Brunei , Thailand , Vietnam , Laos , Myanmar , Cambodia and the Philippines .

These 16 countries contain approximately a third of the world's population and would have a combined GDP similar to that of the NAFTA countries or the EC countries. If this free trade zone is established it will create a powerhouse competitor to both of the other major free trade zone currently in place.

The proposal has the potential to change the nature of global trade in a way that up until now has not been envisioned. There is potential for this new trade block to move to the dominant position globally in a relatively short time fame.

It appears that much of the motivation for this proposal stems from the failure of the World Trade Organization to reach any consensus regarding trade during the last round of talks last year. The western countries have been able to control the WTO talks up to this point but that will change dramatically when this new trade block is created and has the voice of such a huge percentage of the global population.

Merger mania is alive and well in Canada as Domtar and Weyerhaeuser agree to merge their free sheet paper divisions creating the largest free sheet producer in North America in a $3.3 billion deal. EuroZinc has agreed to merge with Lundin Mining Corp creating a mid tier mining company with a market capitalization of $3 billion.

The run up in commodity prices has helped to start a flurry of merger activity that has not been seen in the mining sector for years. The momentum of change is picking up as more companies realize that they need to get bigger fast to be able to take advantage of the current high prices and compete in the global market. The other motivation is to head off an unwanted takeover offer from somebody else.

The global nature of mining has been part of the industry for years but until recently the Canadian mining companies have been sitting on the side lines. The Australian mining industry consolidated a few years ago and the Australian companies have become global leaders and Canadian companies remained about the same size leaving them vulnerable to a take over attempt.

The recent takeover of Falconbridge by Xstrata of Switzerland really increased the global interest in Canadian mining companies. The initial offer from Inco put

Falconbridge into play and before long there were a number of other companies rumored to be interested in Falconbridge. The situation became much more complicated when Teck Cominco then made an offer for Inco which was dependent on the exclusion of Falconbridge, this then put Inco in play as well.

As you all know Inco has been taken over by the Brazilian firm CVRD and the Canadian mining sector is slowly being taken over by foreign firms leaving the rest of the market open for more foreign takeovers now that the Canadian market has attracted international interest.

The Canadian market has many companies that could be on the radar screen of global companies looking to bulk up their commodity producing capacity. The base metal sector is just one the precious metals are also likely to be of interest to globally oriented companies looking to grow by acquisitions.

The recent merger of Barrick Gold and Placer Dome has created a new global power house in the gold sector and Barrick is now one pf the largest gold producers in the world which should keep it off the takeover table. The rest of the major gold producers could be targeted at any time as the price of gold continues to increase and they become even more attractive.

The merger and acquisition activity will likely lead to an increase in valuations for the entire sector as speculation regarding potential take over candidates heats up. In general the commodity stocks have not moved up as quickly or as much as the commodity prices over the past two years.

Looking at this sector on a fundamental valuation basis many of the companies look undervalued. The price earning ratios on most of the mining companies is very low by historic standards with many trading with P/E ratios below 10. If commodity prices just stay where they are today these companies could see a material increase in price just due to an increase in P/E to more normal levels.

The potential for capital appreciation on the fundamental value is enticing, add to that the possibility of a takeover or merger which will bring out the value early and the following companies offer an excellent opportunity.

Copper producer Aur Resources (AUR-T) just reported record earnings for the second quarter of $93.9 million or 97 cent per share and record cash flow of $151.7 million or $1.78 per share.

The company operates two mines in Northern Chile Quebrada Blanca and Andacollo which combined produced 53.9 million pounds of copper, 4.2 million pounds of zinc, 75,000 of silver and 2100 ounces of gold. The company is forecasting copper production of 160 million pounds for 2006. Aur expects to have the Duck Pond mine located in Newfoundland in production by the fourth quarter of this year.

The shares trade at a very low P/E of only 7.2 times and represent good value buy at current levels with an initial target price of $30.00

LionOre International Mining (LIM-T) operates nickel mines in Western Australia , South Africa and Botswana and is forecast to produce 34,100 tonnes of nickel for 2006.

LionOre has developed a hydrometallurgical process designed to treat a wide variety of metal sulfide concentrates. The process utilizes ultra fine grinding and pressure oxidization and is patented under the trade name Activox. LionOre expects to have the first Activox plant in production by 2008.

The company recently reported second quarter earnings of $62 million or 28 cents per share verses $21.2 million or 10 cents per share a year earlier.

Buy at current levels with an initial target price of $12.00.

Aggressive Strategy:

Breakwater Resources (BWR-T) operates mines in British Columbia , Honduras and Chile producing zinc, copper, lead, silver and gold. Breakwater has production forecasts of 240 million pounds of zinc, 18.7million pounds copper, 20.5 million pounds lead, 1.89 million ounces silver and 59,600 ounces of gold for 2006.

The company recently reported second quarter earnings of 429.5 million or 8 cents per share and 6 month earnings of $68 million or 18 cents per share. The shares are trading at an attractive level and represent good value. Buy at current levels with an initial target price of $4.00.

Northern Orion Resources (NNO-T) involved in an Argentinean joint venture copper and gold mining operation Northern Orion has a 12.5% interest in the Alumbera mine with partners Xstrata (50%) and Gold Corp (37.5%).

Alumbrea is forecast to produce 400 million pounds of copper and 600,000 ounces of gold Northern Orion's share will be 50 million pounds of copper and 75,000 ounces of gold. The cash flow from this operation is being used to explore and develop the 100% owned Agua Rica property in Argentina the drill definition inventory indicates the property holds 21.8 million pounds copper, 13.3 million ounces gold and 1.7 million pounds molybdenum.

Northern Orion is well positioned to grow production and take advantage of the current commodity prices. The company represents reasonable value at current levels buy with an initial target price of $10.00.