Agcapita Update

August 2010
Summary

In this hostile financial climate, long-term investors must now give

more thought than ever to capital preservation and sustainable
growth. It is not a profound observation that growth is not
sustainable if it is driven by debt-fueled consumption. Sound
fundamentals for growth include:
– Favorable demographics;
– Low national debt levels;
– High savings rates; and
– Persistent trade surpluses.
 
Many emerging economies have all of these characteristics, while
the so-called ‘developed’ economies have virtually none of them.
Take Canada as an example. It can be argued that Canada suffers
from many of the problems of the typical developed nation, though
to a lesser degree than its G8 brethren. Canada is the best of
the worst, so to speak. Still, it has familiar developed-economy
problems, including:
– Aging population, with unfunded liabilities for social benefits;
– High debt-to-GDP levels;
– Low savings rates;
– Increasing government regulation and intervention in the
economy;
– Large fiscal deficits; and
– An overly accommodative monetary authority.
 
This raises the question: why should investors emphasize
investments in developed economies such as Canada over
emerging economies? The fact is that direct investments in
emerging economies often come with higher levels of political risk
– see Russia’s expropriation of oil assets, or Argentina’s punitive
export tariffs on agricultural commodities during its 2008 food crisis.
The challenge becomes how to obtain emerging economy growth
with developed economy risk.
 
That is the investment draw of Canada. Even though it faces
many of the issues of the rest of the developed world, there is an
opportunity to capture emerging market returns in Canada due to its
uniquely bifurcated economy.
 

1
Summary (continued)
Eastern Canada, represented by Ontario and
Quebec, is heavily exposed to deteriorating US
demand through its automotive and aerospace
industries. To put it simply, Eastern Canada imports
what the emerging economies need and exports
what they make, putting it under pressure on both the
cost and revenue side of the equation.
Meanwhile Western Canada, represented by British
Columbia, Alberta, Saskatchewan and Manitoba, is in
the enviable position of exporting what the emerging
economies need and importing what they make.
What do we mean by this?  It’s a well-understood
process that energy and food consumption undergo
rapid growth as a developing economy makes the
transition to a middle class standard of living. Energy
and agriculture are Western Canada’s dominant
industries – and this region, with only 10 million
inhabitants, is one of the world’s largest net exporters
of both energy and agricultural commodities.  Here’s
an approximate breakdown:
 
Energy
– Oil (13% of world reserves; 4% of world
production)
– Uranium (8% of world reserves; 20% of world
production)  economy may serve as a bridge from the developed
Agriculture
– Potash (60% of world reserves; 30% of world
production)
– Wheat, coarse grains, oilseeds (21% of the
world export market for wheat; 10% for
oilseeds)
– Farmland (80% of Canadian total)
Therefore, investing in Western Canada provides
exposure to emerging market growth in energy and
agriculture within one of the world’s most politically
stable markets. In addition, investors who have a
‘value’ orientation have been provided what we
believe are attractive entry points into the Western
Canadian market by some recent events. 
In the energy sector, the credit crisis has caused
financing to become scarce for junior oil & gas
companies while low natural gas prices are reducing
their profitability. They are being forced to sell assets
to stay in business. This has created a buyers’ market
for the acquisition of smaller oil production assets –
assets that are highly cash-flow positive at current oil
prices. 
 
In the agriculture sector, the regulatory barriers that
made it difficult to invest in Saskatchewan farmland
have recently been liberalized, allowing capital to
move in and acquire the cheapest farmland (on a
productivity basis) in Canada and perhaps the world.
 
We expect China to overtake the US as the world’s
leading economy, but we think Canada’s fortunes will
surprise many. Indeed, Canada’s uniquely bifurcated
to the developing world – at least for investors wise
enough to cross it.
 
2
 Disclaimer:

The information, opinions, estimates, projections and other materials

contained herein are provided as of the date hereof and are subject to
change without notice. Some of the information, opinions, estimates,
projections and other materials contained herein have been obtained from
numerous sources and Agcapita Partners LP (“AGCAPITA”) and its affiliates
make every effort to ensure that the contents hereof have been compiled or
derived from sources believed to be reliable and to contain information and
opinions which are accurate and complete. However, neither AGCAPITA
nor its affiliates have independently verified or make any representation or
warranty, express or implied, in respect thereof, take no responsibility for
any errors and omissions which maybe contained herein or accept any
liability whatsoever for any loss arising from any use of or reliance on the
information, opinions, estimates, projections and other materials contained
herein whether relied upon by the recipient or user or any other third
party (including, without limitation, any customer of the recipient or user).
Information may be available to AGCAPITA and/or its affiliates that is not
reflected herein. The information, opinions, estimates, projections and other
materials contained herein are not to be construed as an offer to sell, a
solicitation for or an offer to buy, any products or services referenced herein
(including, without limitation, any commodities, securities or other financial
instruments), nor shall such information, opinions, estimates, projections and
other materials be considered as investment advice or as a recommendation
to enter into any transaction. Additional information is available by contacting
AGCAPITA or its relevant affiliate directly.

#400, 2424 4th Street SW Tel: +1.403.218.6506 www.agcapita.com

Calgary, Alberta T2S 2T4 Fax: +1.403.266.1541
Canada