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May 24, 2010 Dear Friend,
We upgraded Thompson
Creek Metals and Plum Creek Timber each to Overweight from
Neutral Weight as their share prices had fallen enough to
offer reasonable returns in relation to our respective price
targets of $13 and $41 per share, respectively.
We constructed an
"aggregate" balance sheet and income statement of the
six large diversified mines - - BHP Billiton, Vale, Rio
Tinto, Xstrata, Anglo American and Teck. We estimate their
total $519 billion market cap represents 8.8 times our
estimates of 2011 earnings, debt represents 17% of total
capital (without deducting cash balances) and that they
trade at 1.9 times book value.
Copper, iron ore and met
coal represent nearly 80% of estimated $96.8 billion EBIT
at 26%, 43.8% and 9.8%, respectively. These three commodity
prices need to "miss" or else tax rates need to greatly miss
in order for earnings to fall way short.
The various other
commodities represent just 20% of estimated earnings, with
thermal coal at 5.4%, BHP Petroleum at 4.8% and 10%
collectively from aluminum, nickel, lead, zinc, diamonds,
potash, platinum group metals, chrome, manganese, other
ferroalloys, Rio Tinto industrial minerals, land and other.
We do not believe that these various other minerals will
turn the tables.
We believe the
"market multiple" could be justified as high as 24.6 times
earnings based on low treasury bond yields near 4%. Our NPV
models of the large mines can justify near a 20 times P/E
owing to discount rates near 7%-9% and terminal growth rates
near 2%-4%. We consider a 17 P/E as commensurate to a
"Hold" or Neutral Weight in these shares, which we believe
deserve premiums due to the low cost nature of various
deposits.
We estimate that copper
would need to fall to $2.50 or miss by $1.50 from our $4
2011 estimate and cut copper EBIT by two-thirds, iron ore
would need to fall by one-third or $30 per tonne to miss our
2011 iron ore EBIT estimate by one-half and income taxes
would need to rise to 50% from 32.2% to cut our estimated
earnings in half. We do not expect any of these factors to
develop in such a dire manner, and note that YTD data
suggest record global steel output in April 2010 and record
global copper demand through the most recent March 2010
period for the first-quarter.
We believe the six large
diversified mines have fine potential for 50%-100% upsides
from current levels.
Faithfully,
John C. Tumazos,
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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