These are stories Report on Business is following Thursday, July 26, 2012.
Mario Draghi may have put a spark in global markets today, but it would be wise to be wary.
Markets surged after the chief of the European Central Bank said he'll do what he must to save the euro, a hint that he may be ready to intervene.
"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro," Mario Draghi said at a conference in London today. "And believe me, it will be enough."
Mr. Draghi is under mounting pressure to act as the debt crisis rages, by buying up Spanish and Italian paper to push down borrowing costs. He said today that the elevated yields of Spanish and Italian bonds hurt "the functioning of the monetary policy transmission mechanism," which suggests his mandate allows him to move.
But keep a couple of things in mind here. First, the phrase "we'll do whatever it takes" has become something of a euro group motto over the past couple of years, words we've oft heard from the leaders of the 17-member monetary union, yet the crisis still rages.
"It suggests that the ECB may well do something about capping rising bond yields," said senior analyst Michael Hewson of CMC Markets. "Caution remains the watchword, though, as talk is cheap, but attention will now inevitably shift the focus towards next week's ECB rate meeting to see if he means what he says."
Then there's the issue of what Mr. Draghi could accomplish.
"There is a bit of a logical problem with this statement: High rates on government bond yields are not impeding the transmission of low central bank rates into increased private bank lending (the technical 'transmission mechanism' between central bank policy and the real economy)," said Derek Holt and Dov Zigler of Bank of Nova Scotia, referring to the ECB chief's comments.
Rather, they said, yields have surged because some of the risks in the European banking system pose "an insurmountable fiscal burden" on the governments and their bonds.
"Markets – and south European politicians – are clamouring for ECB intervention in government debt markets in the hope that an ECB summer shopping spree in Italy and Spain would lower borrowing costs (e.g. Italy paid 4.86-per-cent interest on €2.5-billion of 2014 maturity zero coupon bonds that it issued today)," they said in a research note.
"In order for this plan to work for more than a short period, the cause of the crisis would have to be market inefficiency and failure as opposed to fundamental fiscal challenges. If markets are accurately pricing risks, however, it’s not clear that the intervention would help in the long-term."
Chief economist Avery Shenfeld of CIBC World Markets is also doubtful, suggesting that an ECB buying spree could see only "temporary relief" as the markets would deem it to be a short-term measure, particularly if the central bank pulled back after Spain meets its immediate needs.
"Ultimately, the only way to hold down Spain’s borrowing costs on a more sustained basis would be either a full bailout of the Spanish sovereign, in which the [bailout fund] takes over its funding needs, or the ultimate big gun weapon, quantitative easing by the ECB," Mr. Shenfeld said.
"For now, the market’s reaction will be to push yields on Spain and other peripheral sovereigns lower, rally the euro a bit (but only a bit, since QE would be a negative for the euro and some will guess that the ECB is headed that way). Longer term, this is one more step along the path that we believe will prevent the worst case scenario (large scale sovereign defaults and a massive banking crisis) while not yet bringing Europe out of recession."
- Draghi sends strong signal that ECB will act
- Eric Reguly's Economy Lab: Draghi talks tough, but Merkel wrote the script
Barrick delays project
Barrick Gold Corp. shares sank today after the company announced it's delaying the startup of its massive Pascua-Lama gold mine in the southern Andes mountain range for about a year.
This follows a review that forecast project costs would jump as much as 60 per cent, The Globe and Mail's Pav Jordan reports.
"Due to lower than expected productivity and persistent inflationary and other cost pressures, as previously disclosed, the company initiated a detailed review of the cost and schedule estimates for Pascua-Lama in the second quarter," the mining giant said today as it posted a big drop in second-quarter profit.
"Preliminary results currently indicate an approximate 50- to 60-per-cent increase in capital costs from the top end of the previously announced estimate of $4.7-billion to $5-billion, with first production expected in mid-2014."
Barrick's profit in the quarter slipped to $750-million (U.S.), or 75 cents a share, from $1.16-billion or $1.16 a year earlier.
"Our second quarter earnings reflected lower gold production and higher operating costs as anticipated, but we continue to generate strong financial results and expect to have a stronger second half,” said chief executive officer Jamie Sokalsky, adding he has also "initiated a thorough review" of Barrick's mines and projects to determine rates of return and ability to generate cash flow.
"In my view, rate of return should drive production, not the other way around," he said.
Potash profit slides
Potash Corp. of Saskatchewan posted a hefty drop in second-quarter profit today, at the same time projecting its third-quarter results will come in below what analysts expected, sparking a decline in its stock price.
Potash profit slipped to $522-million (U.S.), or 60 cents a share, diluted, from $840-million or 96 cents a year earlier. Sales climbed to $2.4-billion from $2.3-billion.
Stripping out a $341-million hit on Sinofert Holdings Ltd., along with other factors, profit hit a record, the company said.
"We believe the farm production shortfalls expected this year will support an extended period of crop prices at levels that encourage high-yield agriculture, as these deficits are never made up in a single growing season," the company said.
"While economic incentives act as a catalyst for farmers to increase production, higher yields and healthier crops cannot be achieved without proper soil fertility. We anticipate that these factors will encourage rising demand for our products, specifically potash, in the years ahead."
Potash also projected third-quarter earnings per share of 70 cents to 90 cents - below the 95-cent estimate of analysts, according to Bloomberg - and annual results at $2.80 to $3.20, down from earlier projections because of the second-quarter hit.
Shares of Zynga Inc. plunged by about 37 per cent today after yesterday's ugly quarterly report, setting the stage for Facebook Inc.'s results after markets close.
The online game maker left a pall over Facebook, whose revenue is heavily tied to Zynga.
Zynga reported a 19-per-cent jump in second-quarter revenue from a year earlier, but slumped to a loss of $22.8-million (U.S.), or 3 cents a share, from a profit of $1.4-million.
At the same time, it lowered its forecast for the year, projecting earnings per share of 4 cents to 9 cents, putting some of the blame on Facebook.
"We are lowering our outlook to reflect delays in launching new games, a faster decline in existing web games due in part to a more challenging environment on the Facebook web platform, and reduced expectations for Draw Something," it said.
As The Globe and Mail's Omar El Akkad reports, there's a lot of pressure on Facebook today as it prepares to report its first quarterly results as a public company. Analysts expect profit of 12 cents a share and revenue of about $1.1-billion.
- Pressure mounts as Facebook readies to deliver first quarterly results
- Why markets fear a Facebook earnings surprise
- Investors watching Facebook's first earnings report since IPO
Canola a boon
Canola promises to be a $10-billion boon to western Canada's economy this year.
As Bank of Nova Scotia's Patricia Mohr explains it today, canola, whose low cholesterol oil is used in margarine and mayonnaise, for example, is now Canada's largest seeded crop. At 8.6 million hectares, it has outpaced non-durum, or spring, wheat at 7.8 million hectares.
"With relatively favourable growing conditions on the Canadian Prairies this year, canola will likely emerge as a $10-billion crop alongside record output and prices in 2012-2013," she said in a report today.
Ms. Mohr later expanded on the wider impact on the economy:
"Canola now drives Canadian agribusiness - particularly in western Canada, though it is also grown in Ontario," she said.
"It has a big impact on the western Canadian economy also through 'crushing plants' dominates transportation volumes - via rail and ports (Port of Vancouver), with big-volume shipments to Asian markets such as Japan and China."
Indeed, canola could help push total grain and oilseed revenue to a record this autumn.
Ms. Mohr's report comes amid record prices for corn and soybeans of late, pushed up by the disastrous drought in the United States. This, too, will play out in Canada, she said.
"Interestingly, Manitoba farmers shifted more acreage to corn and soybeans last spring - a new development, reflecting high prices for these crops, new varieties of soybeans that are more tolerant of Manitoba weather (moisture) and ‘climate change,’ which has lengthened the growing season," according to Ms. Mohr.
"On a more negative note, record corn prices (pushing up barley, the feed grain in western Canada) will squeeze the profit margins of livestock producers on both sides of the border - limiting herd rebuilding and increasing consumer prices for ‘red meat’ over the next 6-12 months."
A bonus by any other name would still smell as sweet
British Columbia's finance ministry announced this yesterday: "Bonuses will be phased out and replaced with a non-pensionable holdback of up to 20 per cent tied to financial and business results. This change applies immediately to new or newly promoted staff."
Here's how The Globe and Mail's Ian Bailey explains it: Executive bonuses will now be averaged based on the previous four years, the average then added to base compensation. Up to 20 per cent of that will be held back, to be handed out based on performance tied to targets, which will now be tougher.
Got it? That's how you phase out bonuses.
- British bank Lloyds gets Libor subpoenas
- Nomura CEO quits as insider trading scandal widens
- U.S. jobless claims fall, still volatile due to auto jobs