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February 9, 2009 Dear Friend, The agenda for our March 31, 2009 conference is attached. We have invitations outstanding to three more companies in addition to the 15 speakers scheduled. Please let us know which companies you would like to have one-on-ones with. We will visit Carpenter Technology, the 200 mm lb specialty metals company, in Reading, PA on Thursday, February 26th at 11 am. We may continue on to make another stop or two, as 5 of the 6 steel industry antitrust plaintiffs are located in eastern PA or NJ. Just let us know if you would like to join us on any such trip. Attached are reports reviewing Spot Markets, where most prices rebounded last week, and Domtar. We debate appropriate securities analysis metrics internally as the global downturn continues. First, we focus on whether or not companies' core plants have positive gross margins or not. We want to emphasize companies in the top half of the cost curve in their respective competitive arena, and avoid the laggards. Second, we assume superior cost companies can renegotiate covenant violations, as half of the companies we follow are near violations, and that negative gross margin companies will not. Third, we debate dropping a DCF discounted cash flow valuation metric as, much like price-earnings, it discourages ownership at the bottom of the cycle. An alternative would be to use the Black-Scholes option pricing model for Alcoa, Century or Alumina Ltd., treating them as "out-of-the-money" calls when spot prices are below their breakevens. We have given thought to dropping "price targets" from our reports as establishing a basis for their estimation is more and more subjective. Fourth, we believe the bear market placed excess penalties on near-term debt maturities placing huge discounts on companies like Rio Tinto or Teck with debts due. While we do not endorse every company with a weak balance sheet, we believe companies with external funding needs may appreciate most when an upturn in credit availability, metals prices or stock markets returns as they have been discounted too much. Much money "sits on the sidelines," and the recent spate of equity offerings illustrates refinancings. We welcome your feedback. Faithfully, John C. Tumazos |
Copyright © 2008 John Tumazos Very Independent Research,
LLC
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