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July 13, 2010 Dear Friend,
We cut our 2010-11
earnings estimates and raised our 2012-15 earnings
estimates for Alcoa in line with revisions to estimated
LME spot prices, and raised our price target to $18
based on 8 times $2.24 per share estimated 2013-15
earnings and raised our investment rating to Overweight
from Neutral. We are highly encouraged at record 2010
global aluminum consumption at 49.2 mmt up from the
46at.8 mmt prior record 2007 level led by gains in Asian
auto sales. We are highly encouraged by
downward revisions in International Aluminum Institute
capacity projections, which suggest tight markets in
2012 onwards. Further, Alcoa's 3 business segments for
Alumina, Flat-Rolled and Engineered Products perform
near records. Moreover, there is much potential for
either the aluminum market or Alcoa to perform beyond
our projections.
We raised our
investment rating to Overweight from Neutral, and
acknowledge there is some "dead money" risk of our being
"early" in the second-half 2010 and 2011 Alcoa earnings
outlook has risks of losses.
We updated our
simulations on Mercator Minerals, also rated Overweight,
reaffirming our $4 price target despite applications of
SIX contingency or conservamoltive factors. We modeled
only a 90% mill throughput, a 3% copper recovery
shortfall, an 8% moly recovery shortfall, a 10% WACC,
just a 2.5% pretax return on cash balances with no
terminal growth rate, exploration or development
successes and a 35% income tax rate without access to
$64 mm in NOL's created since r 2010. The reliance upon
bank debt creates new levels of external supervision,
supplementing corporate governance, and providing
oversight should Mercator seek to construct a copper
heap leach mine in Mexico or any other project.
Faithully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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