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May 10, 2010 Dear Friend,
The $1 trillion European
bailout plan and 4%+ stock market gains today made last
week's low stock prices an unusually brief "buying
opportunity." What happened? We think virtually nothing
changed in metals market fundamentals, but that a lot of
investors sitting on very large unrealized gains from March
2009 stock market lows sold out fast. We are encouraged at
the 279,000 jobs created in April and the re-entry of nearly
1 mm workers back into the labor force in the U.S.
We continue to prefer the
six large diversified mines as the "classic stocks" to play
the Asia-centric growth in the world economy, and believe
that BHP Billiton, Vale and Teck offer particularly fine
potential to double from these levels. Moreover, their
combined nearly $400 billion market value provides superb
liquidity to trade in and out. The other three that may
grow a little less quickly - - Xstrata, Anglo American and
Rio Tinto -- offer another $200 billion in market cap to the
package. We compare these companies favorably to current
era "one trick ponies," and believe the diversified mines
allocate capital and make decisions much better than U.S.
Steel, Nucor, FCX, Barrick Gold, Newmont Mining, Alcoa or
Thompson Creek Metals among one-product companies. We look
back to the "darling" metals stocks of a generation ago, and
believe the diversified mines are much stronger than Nucor,
FCX, Barrick Gold, Franco-Nevada, Newmont Mining or Alcoa
in the 1990s even though those companies had very high unit
growth.
We are encouraged that
8,301 tonnes of copper inventories were withdrawn from
Shanghai warehouses last week, and expect renewed Chinese
purchases of copper near $3 just as renewed Chinese buying
supported the $2.855 copper price low made February 5th.
We expect support for
$0.93 per pound aluminum prices based on the poor profits,
each near breakeven, of Alcoa, Century Aluminum, Vale or BHP
Billiton in aluminum near $0.982 per pound first-quarter LME
price averages. Production cuts are likely as profits are
near nil, and most profits stem from bauxite and aluminum
and not from ingot nor fabricated products.
Zinc production restart
cancellations are similarly likely at $0.93 per lb, and
provide a support in that particular sector where we do not
believe further large price declines will evolve.
Conversely, lumber orders
fell in recent weeks, current production exceeds orders,
demand normally peaks in May and falls over the final
one-third of the calendar as Winter approaches. OSB prices
tripled and plywood and lumber nearly doubled from their
cycle lows, and it is possible that housing starts need to
sustain > 1 mm units to sustain elevated wood prices.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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