Northwest Mining Stock News — Coeur d’ Alene, Idaho – November 11, 2011

 [A Note to Readers: This is the last of three special Silver Valley Mining Update issues.  Taken together, they give you the big picture changes in the Valley mining industry over the past couple of years.  For Part I and Part II click here. 

These Updates ran longish.  After this, it’s back to our shorter format.  If you’re a glutton for punishment, you can subscribe to the Pennaluna Prospector for free by clicking here and entering your email address in the little box.]

In this issue:

1.     Hecla’s Lucky Friday Mine — new $200 million shaft

2.     Golden Chest Mine — new JV

3.     New Jersey Mill Expansion

4.     Gold and “The Coeur d’Alene Stampede”

5.     Bunker Hill Mine

6.     News Nuggets

·       Timberline Resources to sell driller subsidiary

·       NWMA 112^th Annual Meeting

·       New Sunshine Silver Mines IPO

·       Shoshone Silver/Gold Mining – new management and $$$

·       Pennaluna registers in Arizona 

1.  Lucky Friday Mine – still going strong after six decades 

Along the Montana border by Mullan, the Lucky Friday Mine continues to deliver profitable ore after nearly 70 years of full-scale operation. 

Last year it supplied owner Hecla Mining Company (NYSE:HL) with another 3.4 million ounces of silver, bringing the record to nearly 150 million ounces … plus lead and zinc. 

Hecla, headquartered in Coeur d’Alene, is the granddaddy of all the old timers out here. It was started in 1891.  The stock has traded on the NYSE for almost half a century — and before that for nearly 50 years on the old New York Curb Market that eventually became the American Stock Exchange. 

Hecla controls 25-square-miles in the Valley.  It got the Lucky Friday in 1964 when it acquired Lucky Friday Silver-Lead Mines.  At that point, the mine was becoming a noted producer after years as an also ran. 

The Lucky Friday claims were first staked in 1889.  But over the decades people for some reason decided the ground wasn’t very promising.  So in 1938 a Mullan gas station owner named Sekulic — after a tip from an old miner who had worked at the mine — was able to buy a lease and purchase option for just $15,000.  A good deal, as it turned out.

The Lucky Friday today remains such an exceptional property that Hecla says it will spend $ 200 million to expand operations by sinking a deep new shaft – burrowing down to the 8,800 level. 

It will be the deepest mine in the District, dropping below the Star-Morning’s 7,900 feet.

So far the company has put about $ 70 million into the project … and expects to hit $90 million by New Years.  It says the new shaft could boost silver output by 60% and extend mine life beyond 2030 — and maybe even longer. 

With no debt and loaded earlier this year with over $ 320 million in cash and equivalents, Hecla has said it plans to pay for all the work itself.

But Hecla’s fat wallet has slimmed down lately.  Last summer — after two decades of legal sparring – the company agreed to pay about $260 million to settle its part in the Coeur d’Alene River Basin Superfund lawsuit.  Hecla was the last big miner to throw in the towel. The first installment (a bit over $160 million) was paid earlier this fall.

Despite the size of the settlement, CEO Phil Baker says Hecla can pay it without sacrificing “future growth opportunities”. 

One of those opportunities could be this: the company is now exploring the Noonday and Noonday Split veins, which lie about a mile away from the Lucky Friday.  The veins are near the Star-Morning Mine, another historically heavy producer Hecla also owns.  The company is hoping to uncover a rich ore link between the two mines.

HL has roller coastered in the past year between about $ 4.82 and $11.56.  It’s now down in the lower part of its range at about $6.60.   

                          2.  Golden Chest Mine – new joint venture  

 Several months ago, Kellogg-based New Jersey Mining (OTCBB:NJMC) inked a joint venture deal for the Golden Chest Mine with Marathon Gold (MOZ:TSX) of Toronto. 

The Golden Chest is near Murray, in the old time gold rush part of the District.  That region in years long past yielded something like 300,000 ounces of gold.  [Ed. Note: See Coeur d’Alene Stampede item below.]  The mine is thought to be the District’s largest historical lode producer, delivering about 65,000 ounces of historical gold. 

Marathon will spend $ 4 million to earn half interest and New Jersey will be operator.  NJMC has been working at the mine on a small scale for several years and has so far extracted about 2,000 ounces of gold. 

The two players have varied backgrounds.  Marathon is a young Canadian gold resource development outfit with projects in Newfoundland and Labrador.  New Jersey is a 15-year old outfit run by Fred and Grant Brackebusch, the veteran father and son mine engineering team.  It has gold, silver and base metal projects in North Idaho and western Montana. 

About 10,000 meters of drilling is planned this year, along with underground rehabilitation.  Both have been underway for some time.  The goal is a 43-101 report of a significant open pit gold resource.

Drill results are intriguing.  They show some high-grade intercepts, including one little patch that went over 100 grams gold per tonne.  (NJMC president Fred Brackebusch says results are better than even he expected.)

NJMC has traded lately at about a quarter, down from a 52-week high of .35. 

3.  New Jersey Mill – expanding on the cheap

In addition to the Golden Chest deal, New Jersey is also expanding its mill. But it’s not paying for it.  Here’s why.

In January, United Silver Corporation (TSX:USC) — 80% owner of the Crescent Mine — agreed to pay NJMC an estimated $2.3 million to enlarge the New Jersey Mill.  It’s located near Kellogg, not far from the Crescent.  United Silver’s idea is to use the fully permitted mill to gain near term milling capacity for Crescent production. 

In return for the funding, United Silver will earn one-third interest and usage rights.  New Jersey will be operator and keep two-thirds interest. 

A summer news release said United Silver had already committed about 70% of the $2.3 million and completion was targeted for year-end.  Scuttlebutt suggests the project remains on schedule. 

(The Crescent snuggles between two other silver heavyweights: the Sunshine, which produced over 360 million ounces, and the Bunker Hill with over 161 million ounces.  During six decades of operation, the Crescent delivered around 25 million ounces of silver at average grades above 27 opt…said to be highest in the District.)

4.  Gold and the “Coeur d’Alene Stampede”        

Speaking of the Golden Chest and Murray, did you know the Coeur d’Alene Mining District got its start just downstream from them nearly 130 years ago? 

The motivation in those days, however, was not silver… but rather… gold.  The story goes like this.

Back in 1883, Andrew Prichard found placer gold in the mountain stream that now bears his name.  Word got out and triggered a gold rush that folks called the Coeur d'Alene Stampede.  It was the next-to-last gold rush in the Lower 48.  (The final was in 1909 near Jarbidge, Nevada, just south of the Idaho line.) 

By 1884, thousands of prospectors, miners, merchants, gamblers, “soiled doves”, and others came swarming into the remote and roadless Idaho mountains, seeking fortune in the new gold fields.  They bunched up in a mining camp on Pritchard Creek called Eagle City.  It was wild and wooly, rough as a cob, home to a couple of thousand souls. 

The chance for fast money drew famous Old West figures to Eagle City like flies to honey.  Calamity Jane showed up.  Wyatt Earp and two of his brothers arrived and opened a tent saloon called The White Elephant.  Young Maggie Hall came too — the Dublin girl of negotiated virtue and heart of gold now legendary in the Silver Valley as Molly B'Damn. 

But Eagle City didn’t last long.  In 1885, Noah Kellogg and his famous jackass wandered off one day and discovered rich veins of silver and lead only a few miles yonder on the South Fork of the Coeur d'Alene River.  Thus was the giant Bunker Hill Mine born.

The crowd scurried over the mountains to the new find, frantic to stake the silver claims that would make the region's reputation.  Gold fever was forgotten…but at $1,700 an ounce, this may now be changing.

[Ed. Note: The story of Eagle City is told by Jerry Dolph and Arthur Randall in their book Wyatt Earp and Coeur d'Alene Gold.  You can read about it here: http://www.museumni.org/books_earp.html ]

   5.     Bunker Hill Mine – old production, new rumors 

The Bunker Hill is an unusual situation we want to mention to you.

Bob Hopper, president of the privately owned New Bunker Hill Mine Company, died last January at age 71.  His company bought the Bunker in 1992.  Forever after, the gravel voiced miner fought a running battle with the EPA over water discharge. 

Hopper maintained the massive Bunker on a skeleton basis while he searched for capital to return it to operation.  To fund the efforts, he sold rare pyromorphite crystals from the mine for prices reputed to reach several thousand dollars each.  Word is he had backers from Seattle too.

Uncle Bunker sprawls over 500 patented claims on about 6,500 acres.  Beneath is a warren of workings that may total 150 miles or more. 

Historic ore production was vast, rich in zinc and lead as well as silver.  Reported yield was above 35 million tons.  Average grades topped 8.7% lead, 3.6% zinc and 4.5 opt silver.

Then a major Valley employer, Bunker Hill faced intense labor conflict during the Mining Wars of the 1890’s.  There were strikes, shootings, and the Dynamite Express – when hundreds of angry miners hijacked a train, piled in thousands of pounds of explosives, unloaded their cargo at Bunker’s mill, and then blew the place to smithereens.  Martial law followed.

The New Bunker Hill Mine Company is privately held.  So what it plans to do without the iron-willed Hopper at the helm need not be publically announced and is not known. 

The mine has strategic location… infrastructure … and historic and potential mineral wealth.  Thus, future ownership is the subject of rumor and barroom speculation around the Silver Valley.  We’ll let you know if we hear any word.

6.  News Nuggets

* * *  Timberline Resources Corporation (AMEX: TLR) of Coeur d’Alene has signed a letter of intent to sell its Timberline Drilling subsidiary to a group of private investors that includes some of the contract driller’s managers.  The sale is valued at roughly $13 million and due to close by mid-month.

Timberline says the deal will let it shed all debt and focus solely on its core business of gold exploration, development, and production – especially its flagship Lookout Mountain Project in Nevada. TLR, with a 52-week low of .50 and high of $1.32, is trading lately under .70.

* * *  The Northwest Mining Association opens its 112th Annual Meeting later this month at John Ascuaga’s Nugget Casino Resort in Reno.  The event returns to Spokane next year.

Membership is now 1,300.  Attendance at the recent 2011 Silver Summit conference at the Davenport Hotel in Spokane was very good.  So we reckon attendance will be strong at the NWMA get together also.  For more information, go here:   http://www.nwma.org/pdf/2011regbroch_jul.pdf

* * *  New Sunshine Silver Mines IPO is apparently still in process.  We’ve heard nothing firm on the date of the planned IPO by Sunshine Silver Mines Corporation – the new Denver-based firm affiliated with billionaire Thomas Kaplan, who bought the ‘Shine last year. 

The company plans to sell up to $250 million of stock.  Big names will underwrite the offering: UBS Investment Bank, Morgan Stanley, and RBC Capital Market.  As is common, the S-1 has been amended.  You can see it here:

http://sec.gov/Archives/edgar/data/1517006/000119312511245920/d203663ds1a.htm#toc203663_12

* * *  Shoshone Silver/Gold Mining Company (PinkSheets:SHSH) of Coeur d’Alene last month announced a major change to board and management, with the new guys bringing in “a substantial influx of new capital”.  The three new players– Greg Smith, John Ryan, and Howard Crosby – have long experience in the mining industry.

In the past year, SHSH has ranged between .10 and .28.  It’s trading lately at about 20 cents.

* * *  Howdy, Arizona! Pennaluna & Company is now registered to open new accounts in Arizona…. and it only took us 85 years to do it.  That makes 43 states, and counting.

*          *          *

Thanks for reading. We’ll see you next time.

“All governments are run by liars and nothing they say should be believed.”

   Journalist  I. F. Stone (1907 –1989)

Founded in 1926, Pennaluna trades stocks on all U.S. and Canadian exchanges, Nasdaq, OTCBB and Pink Sheets.  Phone 800-535-5329 or see www.pennaluna.com .  For online trading visit www.penntrade.com.  For a free subscription to this newsletter, click here.

Disclosure: Pennaluna & Company is a FINRA broker-dealer and market maker.  As such, it frequently buys or sells stocks for its own account, or in order to make a market.  Consequently, Pennaluna may at any time buy or sell or make a market in any stock mentioned herein, and associated persons may also buy, sell or hold such stock at any time.  The firm and/or associated persons may also engage in private placements or other investment banking activities with any company mentioned.  Some securities mentioned may be small-cap stocks and subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information; some may be foreign securities and subject in addition to currency, political and other risks. Mention of a security does not imply an endorsement. Comments and opinions are solely those of the writer.  This publication is not investment advice; is not a research report and provides insufficient information upon which to base investment decisions; is intended solely to provide readers with information; is not a solicitation for the purchase or sale of any security; and is not intended to be nor should it be used as tax advice, which should be sought from a professional familiar with your individual financial situation.  Mention of a company or stock does not in any manner constitute a recommendation, unless specifically so stated.  Information is believed accurate but accuracy is not guaranteed.  Any websites mentioned other than www.pennaluna.com and www.penntrade.com are not under the control of the firm and it can take no responsibility for information found on such sites.

[Note to Readers: Well, our plan flopped. We hoped to bring you up to speed on the Silver Valley mining resurgence in just two Update issues…. with plenty of background info to give you context. But we're short of space this issue – thanks to news of the Sunshine Silver Mines IPO, the abrupt Crescent Mine work halt and Dennis Wheeler's resignation from Coeur d'Alene Mines. So we'll wait until next time to talk about Hecla's Lucky Friday Mine, the Golden Chest, the Bunker Hill and the New Jersey Mill.]

In this issue:

1. New Sunshine Silver Mines IPO (Silver Opportunity Partners and Thomas Kaplan)
2. Galena/Coeur Mine Complex (U.S. Silver)
3. "Time Out" Called At Crescent Mine (United Silver)
4. Wheeler Leaves Coeur (Coeur d'Alene Mines)
5. The Last Full Measure of Devotion

* * *

1. Sunshine Silver Mines — New $250 Million IPO

Last time, we gave you some history on the Sunshine Mine at Big Creek and the 360 million ounces of silver it's yielded since the 1880's – almost double the entire production of all the mines in the Comstock Lode.

We filled you in on the ‘Shine's heavy hitting new owners and the $24 million they spent last year to buy the giant producer out of bankruptcy.

Now they're making an important new move – an initial public offering.

In an S-1 filed with the SEC two weeks ago, firms related to Thomas Kaplan disclosed that they've merged into a new Denver-based company called Sunshine Silver Mines Corporation. (Kaplan is the Forbe's List billionaire, Oxford grad, and mining mogul who engineered the mine purchase.)

In the S-1, the new company outlined plans to go public by selling up to $250 million of stock. Big names will underwrite the offering: UBS Investment Bank, Morgan Stanley, and RBC Capital Market.

Where will the money go? Mainly toward two projects:

1.  to refurbish, explore, and complete a prefeasability study for the Sunshine; and
2.  to explore and complete a prefeasability study for the Los Gatos Project in Chihuahua, Mexico, where it has two silver discoveries.

Besides the Sunshine, the company has 17 other exploration properties in the U.S. and Mexico. And it's lined up some notable directors – including Marc Faber and Robert Quartermain, who headed Silver Standard for 25 years. Plans are to list on the Big Board with the symbol AGS.

In its filing, the firm says it believes past producton at the Sunshine cuts the risk of mining there compared to other silver development projects – a twist on the ancient mining saw that the best place to look for a new mine is next door to an old one. Maybe inside the old mine is better still.

The company also declared, "Despite being a prolific silver producing region, Sunshine Silver believes that the Coeur d'Alene Mining District is still highly underexplored." This view echoes sentiments of a number of observers.

Sunshine says it aims to become a premier silver producer. With the money, brains and expertise it's rounded up, nobody in our shop is betting against it.

In any event, the new firm's activity should boost the Silver Valley's come back from near depression… raise investor awareness of the region … and help create opportunities for other area miners.

You can see the S-1 here:

http://sec.gov/Archives/edgar/data/1517006/000119312511183929/ds1.htm#toc203663_14

2. USA's Galena/Coeur Mine — number two U.S. silver producer

US Silver (TSX: USA) last month reported record revenue, profit and cash flow for the first quarter.

In 2006, the outfit bought the Galena Mine and Mill, Coeur Mine and Mill, and Caladay Project from Coeur d'Alene Mines (NYSE:CDE). It shelled out $15 million for the whole package, which lies in the mountains near Silverton.

The Galena/Coeur complex ranks number two behind the Sunshine as all-time U.S. silver producer.

USA got a lot for its money: 11,000 acres of claims; surface facilities and equipment; a $32 million exploration project with a 5,100 foot shaft; and two side-by-side mines that since the 1950's have produced a total of about 200 million ounces of silver… 150 million pounds of copper… and 22 million pounds of lead.

The Galena dates back to 1887. It was mined sporadically until the late 1940's, when a rich new discovery went into steady production.

So far the mine has yielded around 160 million ounces of silver, with last year's production topping 2.2 million ounces. It's a strong lead producer too… and at a buck twenty a pound, lead dollars add up fast these days. Over 250 people work there presently.

The nearby Coeur's historic production totals almost 40 million ounces of silver at average ore grades of 16.6 opt. Closed in 1998 while precious metals were in the tank, the company plans to redevelop it.

US Silver continues to expand its Valley holdings. It's added the historic Dayrock Mine and Mill and several thousand acres of unpatented claims. It now controls around 14,000 acres, including four operating shafts, two operating flotation mills and one non-operating mill – plus surface and underground mining equipment.

Shares have a 52-week high/low of .18 and .63. It trades lately around .63 (Canadian).

[ Ed. Note: Your editor and John Worrell -- head of Pennaluna's trading and market-making efforts -- recently spent three hours underground touring the Galena. Steve Knoll showed us around. He's worked at the mine for over three decades, knows all the ins and outs, and seems rarely at a loss for words. Don Beehner arranged our stroll through the dark and damp, and joined us for the long walk. It was fun and informative. Big tip of our hat to USA and these two guys for a great visit. ]

3. United Silver Calls "Time Out" at the Crescent

Last issue we told you that next door to the Sunshine the Crescent Mine was being revived also.
(History note: starting in 1917, now defunct Bunker Hill Mining ran the Crescent for over six decades. During that time, the mine produced around 25 million ounces of silver at average reported grades above 27 opt…said to be highest in the District.)

About a year and a half ago, United Silver Corporation (TSX:USC) — then called United Mining Group — inked an earn-in joint venture agreement with Crescent owner Gold Finder Explorations (TSX:GFN). Recently it reported earning the entire 80% interest offered in the deal.

Although USC's president stepped down in June, everything seemed to be going gangbusters with the Crescent redevelopment — until the Fourth of July, when fireworks exploded.

USC announced it would temporarily halt mine operations while the Board reviewed the firm's financial situation and potential alternatives "including bridge equity and non-equity financing options, from a select group of interested parties."

The freeze idled about 90 miners and development crew at the Crescent.

The Vancouver-based outfit said it still believes "the fundamentals of the silver market remain supportive for near-term development opportunities such as the Crescent Silver Mine."

At the same time, it reported a planned private placement for up to $1 million, saying management, directors and certain others would participate. The firm also declared it would give no more news about the Board review until a course of action is approved. (Later Canadian reports indicate a possible CDN$ 2 million secured term loan agreement and private placement for up to CDN$ 4 million.)

Meanwhile United Mine Services, the company's Kellogg-based subsidiary, is operating as usual. Last year its contract mining, construction, fabrication and machine services brought in revenues topping $10 million, with gross profit above $ 1.6 million.

During the past 52 weeks, USC has bounced between .48 and .85. Presently it's about .65 (Canadian).

4. Long-Time CEO Dennis Wheeler Leaves Coeur

Coeur d'Alene Mines Corporation (NYSE:CDE), our neighbor down 5th Street, said last week that CEO Dennis Wheeler has stepped down. A director for over 30 years, he had been CEO since 1986.

Mitchell Krebs, company CFO, was named to replace Wheeler. A graduate of Penn and Harvard, Krebs joined Coeur in 1995.

Wheeler, an Idaho native, grew up in the Valley and graduated from the University of Idaho College of Law. Besides his day job, he's been active in the National Mining Association, World Gold Council and Silver Institute.

CDE has a 52-week low near $14 and a high above $37. It's traded lately near $28.

5. The Last Full Measure of Devotion

Recent days have taken a particularly heavy toll on area soldiers and their families:

Specialist Nathan Byers, 24, and Specialist Nicholas Newby, 20, both of Coeur d'Alene and serving in the Idaho National Guard's 116th Cavalry Brigade Combat Team, were killed by IED's during an attack on their convoy in Iraq.

Staff Sgt. Jason Rzepa, also from the Coeur d'Alene area, sustained serious injuries in the action and required amputation of both his legs below the knee.

Seperately, Army Staff Sgt. Wyatt Goldsmith, 28, of Colville, Wash., a Special Forces Medic, died of wounds suffered in an attack on his unit in Helmand Province, Afganistan.

* * *

Thanks for reading. We'll see you next time.

"Suppose you were an idiot. And suppose you were a member of Congress.But I repeat myself."
Mark Twain/Samuel Clemens (1835-1910)

Editor: Tom Wobker

Founded in 1926, Pennaluna trades stocks on all U.S. and Canadian exchanges, Nasdaq, OTCBB and Pink Sheets. Phone 800-535-5329 or see www.pennaluna.com . For online trading visit www.penntrade.com.
Disclosure: Pennaluna & Company is a FINRA broker-dealer and market maker. As such, it frequently buys or sells stocks for its own account, or in order to make a market. Consequently, Pennaluna may at any time buy or sell or make a market in any stock mentioned herein, and associated persons may also buy, sell or hold such stock at any time. The firm and/or associated persons may also engage in private placements or other investment banking activities with any company mentioned. Some securities mentioned may be small-cap stocks and subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information; some may be foreign securities and subject in addition to currency, political and other risks. Mention of a security does not imply an endorsement. Comments and opinions are solely those of the writer. This publication is not investment advice; is not a research report and provides insufficient information upon which to base investment decisions; is intended solely to provide readers with information; is not a solicitation for the purchase or sale of any security; and is not intended to be nor should it be used as tax advice, which should be sought from a professional familiar with your individual financial situation. Mention of a company or stock does not in any manner constitute a recommendation, unless specifically so stated. Information is believed accurate but accuracy is not guaranteed. Any websites mentioned other than www.pennaluna.com and www.penntrade.com are not under the control of the firm and it can take no responsibility for information found on such sites.>

From the Pennaluna Prospector, Coeur d'Alene, Idaho

At Pennaluna & Company, our U.S. customers are showing a burst of enthusiasm for investing in the Canadian stock market. They have an especially strong interest in one particular high-flying segment — Canadian income trusts.

These trusts have turned into red-hot plays in recent years, pushed higher by global energy demand and surging commodity prices, a reviving Canadian economy and stronger Loonie.

Many oil and gas royalty trusts have posted double-digit yields and eye-popping capital gains as energy prices rocket higher. Funds in other industries have been winners as well.

Despite big dividends, large capital gains and favorable tax treatment, these trusts have received surprisingly modest attention here in the States. Now their relative obscurity could be ending. Growing recognition of their fine performance and new developments we’ll mention in a moment may boost their public profile and increase their popularity with U.S. investors.

What they are

Canadian income funds are business entities that buy assets which generate steady cash flow from operations or royalties — often a lot of cash flow. These cash cows are also called unit trusts, royalty trusts, or income trusts, depending upon their industry and various formal distinctions. We’ll employ the terms interchangeably here.

The trusts use part of their cash flow to pay expenses and make provision for buying future assets to keep the business going. They send the rest out to shareholders. Usually these distributions are the lion’s share of cash flow — sometimes over 80% of it. 

The shares, or units, trade like stocks. You’ll find them mainly in the fields of oil and gas, natural resources, electric power, and real estate (REITs), but they’re also becoming common in other fields. 

Right now the top performers are oil and gas royalty trusts. These differ from their U.S. counterparts in key ways. 

For one thing, they can replace depleted properties and continue to operate indefinitely, while their stateside equivalents can’t. For another, Canadian distributions usually qualify for the reduced 15% dividend tax, while U.S. limited partnerships and royalty trusts don’t. Moreover, large chunks of Canadian distributions are often tax-deferred return of capital. Canadian trust websites frequently discuss U.S. tax implications in detail. See, for instance, Unit Holder Info at www.primewestenergy.com.

Fast growth

Because they promise regular and healthy dividends — plus the possibility of big capital gains — income funds have become one of the fastest growing asset classes in Canada. 

In 2003, eight out of every ten dollars raised in Canadian IPO’s went to an income trust. In mid-2004, about 150 trusts traded on the Toronto Stock Exchange, with a combined value of around C$91 billion. Today there are roughly 175 and the total market cap has climbed well above C$110 billion. 

A number of these funds trade both in Canada and on major exchanges here in the States. Often these are larger and better-known funds that have many U.S. investors, like Enerplus Resources Fund (NYSE:ERF/TSE:ERF) or Primewest Energy Trust (NYSE:PWI/TSE:PWI). 

Many others funds trade only on Canadian exchanges. These are usually smaller, lesser known, and have fewer foreign owners. Some observers feel they offer more upside potential than the dual listed funds, although with greater volatility.

Big yields plus big gains

Fat dividends are the trusts’ main draw.  Usually paid monthly or quarterly, yields can be real head turners: Prime West Energy (NYSE:PWI) was recently paying over 12%; Paramount Energy Trust (TSE:PMT) was above 15%; and Harvest Energy Trust (TSE:THE) was nudging 20%.

Capital appreciation can be surprisingly strong also. In the past two years, for instance, the price of Peyto Energy Trust (TSE:PEY) climbed about 300%; Bonterra Energy Trust (TSE:BNE) rose about 150%; and Canadian Oil Sands Trust (TSE:COS) more than doubled. 

In “Canadian Income Funds”, a guide by Peter Beck and Simon Romano, the authors note that from 2000 through 2003 the income trust market as a whole rang up total returns of 150%. That’s $2.50 for every $1.00 invested. 

New boost?

Besides the factors now driving investment in income funds, three new developments could give these funds an extra boost in the future. 

First, theoretical concerns over unitholder financial liability were essentially laid to rest recently when Ontario, Alberta and Quebec passed legislation that gives unitholders the same protection corporate shareholders enjoy. This ends a remote possibility and opens the doors to greater liquidity. Since these provinces are home to the majority of funds, others will be forced to follow suit or lose their trusts to them.

The editors of Roger Conrad’s Canadian Edge newsletter — a good source of news and investment recommendations on income trusts (www.canadianedge.com) — say they expect this change to pave the way for participation by institutions that previously stood on the sidelines, thus magnifying trading volumes. They also think it led to Standard & Poor’s recent decision to start including some trusts in the benchmark S&P/TSX Composite Index later this year. 

Second, Canada has tabled a proposal to limit foreign ownership, which most trusts opposed. The idea may not be dead forever, but the victory shows the industry’s growing power to prevent government interference. 

Third, U.S. tax treatment has been clarified by the IRS. It appears now that nearly all Canadian trust dividends (except for a small number of passively managed funds and limited partnerships) are considered “qualified." As such, they escape double taxation and are eligible for the 15% dividend rate granted by the Bush 2003 tax cuts, a significant savings over ordinary income rates. 

A few thorns

Of course, a few thorns lurk among the roses. Most important of these is risk. All international investing carries currency, political, and economic hazard. And while many income funds are relatively conservative investments, they are potentially volatile. This is especially true of oil and gas trusts, which have enjoyed a magnificent ride recently but can react strongly to pull backs in energy price.

Also, trading the high-flyers available only in Canada isn’t as easy for Yanks as trading in the States. There are manageable but sometimes annoying issues of currency, trade execution, settlement, and tax reporting. These result from the relatively complex logistics involved (one reason why some brokerage firms charge extra for Canadian trades… which, by the way, we don’t).

And in December Canada extended its required 15% dividend withholding to cover U.S.-owned IRA’s. These were previously exempt. U.S. fund owners can take a foreign tax credit for this withholding in taxable accounts, but for IRA’s this doesn’t seem possible. Still, many funds offer yields so sizeable that even with the tax bite they’re well ahead of competing investments.

Information resources

We don’t claim to be the last word on Canadian income funds, and this brief overview is not investment, legal or tax advice. Confer with your own advisors for that. 

If you’re interested in the investment potential of these trusts, here are a few resources that will tell you more:

“Canadian Income Funds” – a book by Beck and Romano, available at bookstores or online

http://www.canadianedge.com/ — a U.S. newsletter that give news and investment advice on over 100 Canadian income trusts

http://www.adviceforinvestors.com/ — profiles and quotes from MPL Communications, a large Canadian investment information firm

http://www.investcom.com/incometrust/incometrust.htm — a financial site with a section on Canadian income trusts

http://www.kpmg.ca/en/services/tax/tnfc0504.html — a recent paper from KPMG Canada about U. S. taxpayers and Canadian income trusts

The Author–  Tom Wobker holds degrees in journalism and law from the University of Kansas. He is a principal with Pennaluna & Company, a NASD broker-dealer and market maker with its main office in Coeur d’Alene, Idaho, and clients in a number of states. Founded in 1926, Pennaluna trades stocks on all U.S. and Canadian exchanges, Nasdaq, OTCBB and Pink Sheets. Phone 800-535-5329 or visit www.pennaluna.com. For online trading visit www.penntrade.com.

Disclosure: Pennaluna & Company is a NASD broker-dealer and market maker. As such, it frequently buys or sells stocks for its own account, or in order to make a market.  Consequently, Pennaluna may at any time buy or sell or make a market in any stock mentioned herein, and associated persons may also buy, sell or hold any such stock at any time. The firm and/or associated persons may also engage in private placements or other investment banking activities with any company mentioned. This publication is intended solely to provide readers with information.  Mention of a company does not in any manner constitute a recommendation, unless specifically so stated. Information is believed accurate but accuracy is not guaranteed.