COPYRIGHT 2011 © Foundation CMG

I think Ben Carson is wrong about how the Holocaust victims would have been able to save their lives had they only had guns. I never knew my mother's parents, Abraham and Amalia Goldschmidt who raised Mom and her 4 sisters in Sterbfritz, a market village in Hessen where they remained after their daughters had fled to America in the late 1930s.

My grandparents were old but not wise: they had no idea how bad things would get after Hitler was democratically elected in 1933. My grandfather had served in the German Army as a conscript (like most German Jews) and knew how to use a gun. They lived in a village their family had inhabited for over 200 years. My Opa ran a business selling fertilizer, seeds, pesticides, and herbicides to local farmers.

In 1938, after my mother had already gone to America, my grandfather took his horse and cart to collect a debt (after the harvest had been brought in) at a village up the hill, called Vollmaerz. There he was attacked for being a Jew by the children of the village school led by their teacher. He was shocked but his reaction was to drive back home and forget about the debt.

Over a year later my grandparents were driven out of their house by their Huguenot neighbors, whose ancestors had settled there because of religious persecution in France. They were trying to out-Nazi the Nazis and turned on the local Jews. My grandparents were sent to an old age home in the Ghetto in Frankfurt by the local Burgermeister along with other Sterbfritz Jews.

My mother and her sisters communicated with their parents using a drop-box run by a relative in neutral Switzerland after World War II began. When my cousin Sandra was born (on July 4, 1943, a good date for a little American), her mother wrote to tell her parents. The letter came back: “Addressee Unknown.”

My grandparents and other residents of the old-age home had been deported in cattle cars from Frankfurt to Belarus where they were killed. I cannot imagine any respectable elderly Germans taking up guns to defend themselves against their Nazi neighbors at any stage in this process.

*It is hard to find little-known energy companies likely to gain from further upward movements in oil prices. But I think we have one, Computer Modelling Group, CMGBY from Calgary, also traded as CMG-Toronto. This company like others in the oil patch suffered from lower prices but its specialized business of modeling oil reservoirs and gas wells to extract the most is doing better than most. It managed to increase revenues and cash flow despite weak oil and gas prices in the past 12 months, mainly because its technology is in demand . It also has changed its billing system to get more business, mostly outside Canada and Latin America, where drilling has slowed down.

It has upped its licensing of software to model oil- and gas-fields, particularly its perpetual licenses, to build out its US and Eastern Hemisphere business to offset losses in Canada. Eastern hemisphere means Europe, Africa, Asia, and Australia.

CMG has sales offices in Houston, London, Caracas, Dubai, Bogota, and Kuala Lumpur as well as in Calgary and sells to over 60 countries. Most buyers are in the hydrocarbon business but it also sells to analysts and drilling specialists and does contract research.

In Q1 FY 2016 (it uses a March 31 year end) it landed a $1.1 mn US perpetual license and another 9 digit one in the eastern hemisphere, both records.

Licenses account for about 90% of revenues. Perpetual licenses allow the client to get the current software package to use as long as it wants to and provide a less predictable revenue stream. Annuity or maintenance licenses which have to be renewed as the software is improved are the real cash cow, but the market is changing and in the June quarter, perpetuals accounted for 13% of software revenues, vs 8% for all of FY 2014. The licensing revenue can vary quite a bit from quarter to quarter since often the buyer is an oil major.

CMG only books some revenue when funds have been received from clients with problems. At least one major client is suffering from economic conditions in its Venezuelan homeland and its orders are only recognized when payments are in hand. With more perpetual licenses there will be more quarter-to-quarter variability. Another factor which you need to recall is the C$-US$ exchange rate, since most oil industry licenses are denominated in greenbacks. The June quarter exchange rate was 1.2664 US$ per Canadian vs prior year levels of 11.76.

CMG total sales in the June quarter were C$21.44 mn, so these greenback denominated deals make a big difference when translated into loonies, and helped boost total loony sales by 10% over Q1 2015, net income up 9% to C$6.8 mn and eps to 9 loony cents from 8. This was lower than Q3 and Q4 2014 levels of 14 and 9 loony cents respectively. The dividend for the quarter was kept flat at 10 cents Canadian and R&D spending was boosted by 5%.

The figures would have been higher but for a boost in taxes in Alberta to 30.2% from prior year's 28.5%. Also the switch from quarterly to annual billing caused some erosion. Its operating profit comes in at close to half of revenues, a nice bit of business if you can get it. It gross margins are at over 77%, another nice piece of change.

As must be clear by now from these numbers, CMG is a small cap in the world of oil majors.

Canada software sales came to C$6.025 mn; US ones to C$5.413 mn, up 48% y/o/y; Latin American to C$2.06 mn and Eastern Hemisphere accounts for C$5.8 mn, up 63% y/o/y. Note that some of the lost Canada business resulted from customers choosing to license via the US sub. As note already Venezuela causes Latin American sales to vary a lot by quarters and by year.

While I don't want to predict, particularly not about the future, CMG usually books higher revenues in H2 than H1 mainly because of recognition of orders received earlier waiting until they get the cash.

The main cost of doing business, thanks to Canada's woes, is reduced because of the exchange rate. Some 79-82% of operating expenses are related to direct employee costs. It has marginally increased its full timers by ~5% and also increased compensation and benefit levels. But it still wins as a result of loony weakness. R&D eats up about 21-22% of revenues.

Dividends look safe mainly because CMG aims to pay out level divvies during the year and get rid of the end of year bonus. It also bought back shares in 2014 and while it has a program in place for the current year, it did no buybacks in Q1. It has C$79.4 mn in cash and another C$800,000 bank line of credit. Its total capitalization is C$999 mn, with the stock at C$12.66/sh.

CMG has a jv with Shell (RDS-A) and Petrobras called CoFlow to simulate deep offshore revenues begun in 2006 and it capitalizes its costs, now at $6.4 mn Canadian. CoFlow is updated now to version R10 about to be released to the partners and the project will continue for 4+ years more.

Net of cash and CoFlow its capitalization is C$914.2 mn. There are also 6,425 options on common shares granted to employees which can be boosted to 10% of shares out or 7.9 mn if this were deemed useful. The options amounted to C$881,000 of compensation expenses in Q1, down from prior year. After the quarter closed CMG issued another 1.25 mn options under its plan.

In addition, CMG sponsors the CMG Reservoir Simulation Foundation (Foundation CMG) which promotes and finances R&D and provides student research grants at universities and industry centers in North America. CMG Foundation has financed research and innovation in oil and gas reservoir modelling for over 30 years and also provided the picture heading this article. (Modelling in Canadian-British spelling for modeling (US) and not a typo.)

Non-Ferrous

*Brazil's Vale (VALE) signed a letter of intent for Norsk Hydro (NHYDY) to buy its 40% stake in bauxite producer Mineração Rio do Norte and beleagured Alcoa (AA) and Rio Tinto reportedly are ready to tender shares in the Brazilian producer of about 7% of the world's aluminum raw material. This would give Norsk control. Price and terms were not revealed but VALE shares rose 4% to $5.50. Norsk was upgraded to a buy by Goldman Sachs on the news. (We owned NHYDY before it ended its ADR sponsorship.)

The price then backed down after Vale's Sudbury nickel mines were raided by environment regulators for allegedly leaking tailings into a fish stream. Vale has had labor, health, safety, and environmental problems in Canada. Norsk was upgraded to a buy by Goldman Sachs on the news.

*News that Glencore (GLEN) was cutting its zinc production by a third because of the metal price plunge immediately boosted competing zinc firms, as well as GLEN. Japan's Toho Zinc rose 25% last week. Vedanta Ltd (VEDL) rose around 14% on Wall St. VEDL rose more than its parent, Vedanta Resources, VED, up only 12.2% in London where Lonmin rose 16.2%.

Other Deals

*Delek Group (DGRLY) of Israel via a sub will take just under 20% control of North Sea oil and gas operator Ithaca Energy Inc of Canada for C$1.05/sh or a total of US$66 mn. Ithaca trades on the London AIM and in Torotno and is worth about C$290 mn in total. No other shareholder owns double-digit percentages. Ithaca is a partner in 11 producing fields, an operator in 3 of them, notably the Greater Stella Area which is in development.

DGRLY gets to name two reps on the board but has not yet told the world how it will account for the investment, its first diversification into production outside the eastern Mediterranean. Delek CEO Azi Bartfeld called the move “an important strategic step expanding operations and strengthening international” citing its “professional management, experience in production, and very high standing in the international energy market.” The implication is that existing management will continue to least Ithaca. Bartfeld added: “we intend to continue to take advantage of opportunities in the markets and to examine further strategic investments in the energy field.” IAE rose 12.4% in London trading last week.

*Separately, Afek Oil & Gas found a significant oil deposit on the Golan Heights, in a contested Israeli-occupied formerly Syrian area which also has unique flora and fauna.

*Bloomberg expects Ferrari will be valued at as much as euros 11 bn (nearly $12.5 bn) when ~10% of the shares are ipo'd by Fiat Chrysler Autos. FCAU made another bargain with the United Auto Workers which will end the two-tier wage level dating back to the GM crisis, which will still have to be voted on by the rank and file. Both bits of news boosted FCAU up about 1% last week.

Finance

*HSBC analysts today upgraded Zurich Insurance to a buy from a hold. ZURVY along with Allianz and Validus Holdings (VR of Bermuda) has been under a cloud because of disasters like flooding in Peru and Colombia SC. All 3 were up last week.

*Now that Crédit Suisse looks like following Deutsche Bank into raising more capital by stock issues and cutting dividends, one gainer is Santander Group which did these thing in the last winter. This is an example of a female-headed firm showing managerial caution rather than piling on new risks. SAN is headed by Ana Patricia Botin who succeeded her father Emilio in the late summer of 2014. In macho Spain you have to be very good to beat out your brothers and male cousins to become heir to the bank founded by her great-grandfather and expanded by her father.

Drugs and Health

*CAE Healthcare (CAE) sub delivered a first Impella simulator for ultrasound and fluroscopy imaging in Vimedix heart pump training to Abiomed. Abiomed is a leading cardo technology firm, maker of the Vimedix. The simulator will train those treating patients not getting heart surgery.

*GlaxoSmithKline (GSK) paid a further option fee to fund research into inhaled organic nano-therapeutics called PRINT at Liquidia Tech of Morrisville NC under a deal originated in 2012. The US Research Triangle firm is privately held and is working on pneumonia and typhoid vaccines on behalf of the Bill & Melinda Gates Foundation. GSK reports Oct. 28 with a cc on Nov. 3.

*In an exclusive interview with Jim Cramer, Alkermes (ALKS) CEO Richard Pops pooh-poohed political attacks on drug price gauging. ALKS was an Irish inversion play last year. It has fallen ~17% YTD despite its pipeline which led us to stick with the stock after the US Administration ban on inversions last year. Pops argued that drug companies with good products will gain in any political environment. He particularly mentioned the long-lasting jab for schizophrenia, our reason sticking with Alkermes. He said the US “tolerates relapses from patients not taking their medications, but it doesn't have to” if they are switched to injections lasting 4 to even 8 weeks. This would “dramatically lessen the burden on patients” to take meds daily. All very sensible but nonetheless ALKS was down 2.6% today on the Cramer kiss-of-death, before recovering.

*Galapagos (GLPG) presented the first of 5 posters at the North American Cystic Fibrosis Conference in Phoenix. It appears that its GLPG 1837 potentiator was deemed in phase I to be safe and tolerable in healthy human volunteers. This doesn't mean it will work on Class III mutation CF patients with F508del gene errors in phase II trials. GLPG is focusing on CF because its drug for rheumatoid arthritis was turned down for phase III trials by Abbvie. GLPG scurried among its Dutch and Belgian insiders for more cash to do the RA JAK1 inhibitor trials solo, and now is presenting its work on CF. The Belgian stock was up 1% last week after falling over 5%.

*Teva (TEVA) is under attack because it hasn't yet indicated that it will up its dividend next month.

Transportation

*Tencent über Uber. Shanghai gave the Tencent-Alibaba car-share jv Didi-Kuaidi a first-ever Chinese license, supposedly a test. Meanwhile Uber is working on its applications. I learned from the current Bloomberg-Business Week that informal Uber China drivers include rich young men driving posh foreign cars hoping to met women impressed enough by their wheels to give them sex. Ferraris are a fave of the “fuerdai”, 2^nd generation rich spoiled brats, the weekly wrote. TCTZF.

*COPA Holdings (CPA) is up sharply again today but it is still yielding 5.5% after rising 18% last week. The Panama airline crashed after its last quarterly revenues came in very far from the runway. CPA was tipped by Deutsche Bank as an airline favorite. The Latin airline has low debt. It was named a “Barbarian at the Gate” stock by Cramer, meaning it may go either way. He rates it hold. Zacks rates CPA a strong sell.

*I will refrain out of modesty for making any comment about Bombardier, BDRAF, today. We sold the Canadian transport small cap over fierce objections from Bay Street, the Wall St. of Toronto. We should have done it earlier.

Fund Notes

*New Ireland Fund's CIO Noel O'Halloran and Chief Economist Eoin Fahy, both staffers at Kleinwort Benson, the UK portfolio manage of our IRL fund, will speak on Oct 28 at a Capitalink conference on Europe's Bright Spot, along with a Davy broker. Certified Financial Planner candidates will get points for this event. Nicolas Bornosis, the head of Capitalink, a Greek-American, is now wearing o' the green.