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December 24, 2010 Dear Friend,
We raised our
HudBay Minerals price target to $26 from $22 per
share as we incorporated five projects into excel
models -- the Lalor wholly-owned gold-copper mine in
Manitoba to run in 2012, the 70%-owned Reed Lake
venture in Manitoba with VMS Ventures, the 51% but
possibly 75% owned Michigan joint venture with
Aquila Resources, Wisconsin satellite deposits to be
trucked over the little river to the Michigan mill
and an assumed 66.7%-owned Guatemalan venture.
We incorporated
many conservatisms into our HudBay model, which
would generate a $40+ target without them. We did
not incorporate a possible Lalor Gold IPO, we used
an 8% discount rate and 1% terminal growth rate in a
DCF format, we did not incorporate 24% stepups to
the HudBay participation in the Aquila Resources
venture and our metals price estimates for copper,
zinc, silver and gold are below current levels.
We are highly
encouraged at the 16% drop in Chinese aluminum
output between June and November 2010, and note that
Chinese aluminum output is 10% less than November
2009 causing global output to be up just 0.5%. We
estimate global aluminum inventories fell 323,000
tonnes (without November or December IAI producer
inventory data) with the 212,770 tonne two Chinese
State Reserve Board auctions in November
representing the larger part of the drawdown.
Smelter operating rates outside China exceed 90% and
within China nearer to 70%, and we raised our
2015-2016 LME aluminum price estimates to $1.40 from
$1.20 per lb. We believe the consensus will move
towards aluminum shortages in 2012 or 2013 after
bigger declines in the current 4.9 mmt LME and
Shanghai warehouse inventories, but patient
investors may want to buy aluminum stocks now ahead
of a future stampede. We upgraded Alcoa on July
12th and Century Aluminum also to Overweight or Buy
on November 5th.
We wrote a
separate report December 18th about declines in
global refined copper output as mine concentrate
inventories appear to have been used up.
Two weeks
ago commodity exchange copper inventories rose
22,000 tonnes and zinc inventories rose 72,776
tonnes, while LME nickel stocks rose 5,124 tonnes
these past two weeks. We combined our
interpretation of the weeks December 17th and
December 24th in this report for brevity during the
Holidays.
Best wishes
always,
John C. Tumazos,
CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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