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May 15, 2010 Dear Friend,
We dramatically increased
our earnings estimates for Overweight-rated Anglo American
to reflect higher iron ore, met coal, and thermal coal spot
prices. Further, quarterly resets and three recent
underground met coal tragedies in Russia, China and West
Virginia suggest more upsides are possible. Anglo American
sold down to a mere six times our revised 2013 earnings
estimate.
We dramatically raised
our future estimates of capital spending and cut our
estimate of the future terminal growth rate to 2.3% from
2.6% to "hold down" our price target to $28 per ADS. My
colleague Mickey Foley's first pass DCF run actually popped
out a $45 per ADS price target, but I chose to insert a wide
array of capital items into the 2014 to 2020 profile to
maintain a $6.4 to $6.8 billion record capital outlay
profile. Further, a lower terminal growth rate is
appropriate as commodity spot prices become more elevated,
creating downside risks.
From a purely qualitative
standpoint, Anglo American places a lesser priority upon
cash distribution to shareholders and we fear raising
investor hopes too high. It is the last of the six large
diversified mines to pay a dividend after the world
recession, instead funded rights offerings into DeBeers and
Anglo Platinum, and refused to engage Xstrata's merger
overtures that can be criticized as "no premium" in nature.
These qualitative indications impact us a little more than
Chinese credit tightening, any demise of the European
currency union or Australian tax proposals. It is
important to emphasize further that our financial model is
relatively conservative in the high capital outlays, and
that Anglo American's financials are so robust in the
current poor global stock markets that we have to
"restraint" our valuation models.
Separately, we updated
our analyses of AngloGold Ashanti, which we rate Underweight
as we assign valuation discounts to their geographic mix of
assets prevalently Africa, and we assigned much deeper
discounts after the African Barrick IPO and the mistreatment
of First Quantum in Congo in recent months. AngloGold cut
its hedge exposure to 3.55 mm oz with a $2+ billion loss not
realized, booked or funded. We rate it Underweight despite
the strong gold market and rate Goldcorp, Agnico-Eagle and
Greystar Resources Overweight instead.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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