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May 17, 2010 Dear Friend,
Last week 7 of 8 "resource currencies"
that we monitor rose, commonly viewed as a bullish signal for world growth.
The only decliner was the $A, owing to disenchantment with the proposed
Resource Super Profit Tax. Most resource currencies rose 1% to 2% against
the US$.
Clearly investors are fleeing the Euro in
droves, and the US$ is not necessarily their first choice. Resource
currencies, gold bullion, the yen, the US$ and US treasuries are all
destinations. Does this mean inflation as opposed to recession ?
Shanghai inventories rose by 0.2% of
global zinc and 0.1% of global aluminum consumption last week, while falling
by 0.05% of world annual copper demand. We theorize that provincial
governments or the that bailed out local aluminum and zinc smelters over a
year ago are cashing out, while various traders buy copper aggressively near
$3. The 23,000 t zinc and 45,000 t aluminum buildups were large, and the
8,000 t copper decline was relatively large too.
Five of the 6 large diversified mines,
all but Rio Tinto, now trade at < 6 times our 2011 earnings estimates.
Presumably iron ore and copper, the two largest earnings contributors, would
need to fall 50% short of our expectations for the earnings to fall
sufficiently short of expectations to cause the current share prices to
equate to 12 or 13 times a very depressed 2011 earnings performance.
However, crude oil's decline to $70 suggests falling costs, at least for
energy and transportation, benefiting the outlook for earnings. Further,
met coal and nickel markets suffer large supply disruptions, and have the
least potential for profit declines next year.
We do not expect recession to over run
any of the major continents in 2011. Clearly several profligate countries
could suffer downturns like Greece, Spain, Venezuela, Congo or Australia.
Fortunately none of these are key drivers of global demand.
Shares increasingly appear to us as
attractive values, and our favorites are BHP Billiton, Vale and Teck in the
current selloffs.
Faithfully,
John C. Tumazos, CFA,
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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