OIL & GAS ENERGY INDUSTRY OUTLOOK

Exploration and production stocks in the energy industry (as measured by the XLE) declined 6.5% in the June quarter in response to an 11.5% decline in West Texas Intermediate oil prices. At prices now in the mid to low forties, production economics are once again being tested even as companies continue to work to lower the cost of production. A sustained price at current levels will undoubtedly result in a pullback in drilling, with the subsequent effect in production, and expected bounce back on prices. We expect such a reaction to be quick and reiterate our belief that oil is likely to trade in a narrow range between $45 and $55 per barrel for the next several years. We continue to maintain a cautious outlook towards the group. We favor and support companies that maintain strong balance sheets, have a large hedge position, and operate in regions with low operating costs.

MINING AND METALS INDUSTRY OUTLOOK

Mining companies (as measured by the XME) declined 1.3% in the June quarter. It was a relatively quiet quarter for the group. Gold prices declined 0.8%, offsetting normal summer weakness. Silver prices fell sharply (down 9.0%) reversing the movement we saw in the first quarter. Investment activity seems to have begun to pick up and we are seeing an increase in acquisition announcements. We continue to believe the future for precious metal prices is bright. We look for strong economic conditions to increase the demand for gold and silver. At the same time, decreased exploration and drilling in recent years will limit the amount of new supply brought to the market. The result will be a decrease in the glut of supply hanging over the market and eventually higher prices. We favor companies that are cash flow positive but also have assets under control that they can exploit should prices rise.

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