October 1, 2010
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 October 1, 2010

Dear Friend,

Lowering our discount rate to 8% in our Teck DCF, where thirty year bonds recently were sold at 5.868%, increased the DCF value to $123 per share.  We no longer separately value up to 4 bil barrels of estimated bitumen oil sands reserves at up to $6 per barrel as we did in the dark days a year or two ago as we now model the cash flows, but those values seem less far fetched as UTS Energy sold its 20%  of Fort Hills for $2 per barrel prior to cap  ex.  We maintained our $95 price target, which seems "restrained."
 
We undertook a review of Teck's 10 major capital projects, whose revenues appear to be 52% of $16.6 billion in estimated outlays or a 52% "asset turnover."  Quebrada Blanca and Galore Creek are the laggards.  Three oil sands projects range from 23% to 26% asset turnover at current prices, but typical $15 per barrel operating costs suggest > 50% pretax margins.  We estimated $3 to $4 billion peak cap ex in 2014 to 2017 mostly for 3 oil sands projects.
 
We raised our earnings estimates for Overweight rated Worthington Industries owing to strong results in 3 of 4 major areas and a 6.5% share repurchase.
 
Our database of 42 copper transactions since 2005 averages $0.12 per lb of in situ copper resources in all categories.  Buyers behave as though their long-term copper price expectations are $1.75 to $2.00 per lb, and capital investment decisions to build mines seem to reflect similar expectations near half of recent commodity exchange prices.
 
  • Gold transactions have averaged $256 per ounce of reserve and $197 per ounce of resource in the cases where reserves or resource was available at the time of the transaction.
  • Gold transactions have trended higher recently on a $/ounce of resource basis.  The regression line fit escalated from near $100 in 2005 to near $300 more recently, but there are many outliers.
  • We have constructed a database of 35 transactions over the past five years as gold prices escalated from $500 to $1,300 per oz.  Typical transaction terms have escalated from $75-$300 in 2005 to $100-$1,300 per oz in 2010.
  • The standard deviation of gold transactions in our database on a $/ounce resource basis has been $255 which is 1.3 times the average transaction price while copper transactions have a standard deviation that is only 70% of the p average deal price.  The relative volatility of the gold deals are twice as much as copper.
  • In general, three “special circumstances” provide “outliers” among gold transactions.  First, Goldcorp paid large sums for Eleonore and Gold Eagle with no resources at all.  Second, Kinross paid over $1,000 for Underworld or Goldcorp for Andean Resources in anticipation of many more ounces.  Third, major mines sell “dogs,” localize in Indonesia, set up “Black Empowerment Transactions” in South Africa or sell down perceived reclamation liabilities at minor values as reserve lives wane.
Faithfully,
 
John C. Tumazos, CFA
Copyright © 2008 John Tumazos Very Independent Research, LLC
Send mail to joe@veryindependentresearch.com with questions or comments about this web site.
Last modified: 05/17/12

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