|
|
|
|
October 25, 2010 Dear Friend,
We calculated
earnings sensitivities for all the copper mine,
diversified mine and gold mines we follow, and
determined that FCX, Antofagasta PLC, Teck,
Xstrata, Anglo American, HudBay Minerals and Mercator
Minerals have the best exposure among the
companies in our full coverage to high copper price
scenarios, such as $5 to $15 range. We wish time
permitted us to evaluate Capstone Mining and Imperial
Metals more fully. We ignored Grupo Mexico, Southern
Copper, Ivanhoe, First Quantum and other African copper
deposits owing to political risk issues.
We chose to evaluate
earnings sensitivities between $5 to $15 per lb copper
because the price elasticity of scrap copper supply is a
key unknown, and we believe that a 1 to 2 mmt annual
increase in scrap copper recovery from the 15%-plus
towards 25% recovery rate will be needed to balance
copper markets. We believe that price-elastic erosion
of copper demand already occurred as copper prices rose
from $0.60 in the past decade, and little remains. We
expect mine supply to be inadequate until 2014 when
Ivanhoe in Mongolia and Xstrata Las Bambas in Peru begin
full output, and may remain inadequate afterwards. WE
ASSUME THAT 50% OR HALF OF REVENUE UPSIDES ABOVE $5
COPPER ARE ERASED with higher energy, wages, sulphuric
acid, adverse currency shifts, royalties, taxes,
windfall taxes, etc. For example, the A$ or Chilean
peso are likely to appreciate in a scenario where copper
prices double or triple. Algebraically, our $15 copper
scenario with 50% of the price rise negated by costs,
currencies or taxes is equivalent to a "naïve $10
scenario" without escalation to costs, currencies or
taxes.
We downgraded Rio
Tinto to neutral this morning October 25th, Vale on
October 21st to Neutral and BHP on October 9th l to
Neutral owing to combinations of (1) price appreciation,
(2) cost increases from a 10% stronger A$, Brazilian
real and other resource currencies, (3) lower iron ore
prices, (4) a 14% drop in Chinese steel output since
April to Sept., (5) higher capital spending and ( 6)
other factors. In Vale's case we worry Vale's 4 mines,
Xstrata's Falcondo and Anglo American's Barro Alto new
mines or restarts may be too much. We cut our price
target to $66 from $74 as we moved to Neutral from
Overweight for Rio Tinto.
Our updated "Big Six"
diversified mine comparisons illustrate about $80
billion of collective share price appreciation since our
last July 22nd wriitng, even though our estimates of
2010 earnings and revenues are less. Our reaffirmation
of Overweight ratings for Teck, Xstrata and Anglo
American downgrading to Neutral of BHP Billiton, Rio
Tinto and Vale has made our investment viewpoint
"COPPER-CENTRIC" and "IRON ORE-PHOBIC." We believe the
rate of growth of copper supply is nominal in the near
term, and the rates of growth of iron ore supply are
much larger. Further, we believe the Australian and
Brazilian currencies may each appreciate another 10% or
more owing to the resource endowments of those fine
nations, and we worry BHP, Rio Tinto and Vale may have
stagnant iron ore revenues with appreciating
currencies. In a sense, our investment shift is similar
to the May 2010 Australian mining tax scare, but rather
stemming from the exchange rate and perhaps a worry the
Aussie Green Party resurrects a stricter tax. Finally,
we do not expect Quantitative Easing to impact China's
steel output or these companies' iron ore revenues, and
view the Quantitative Easing stock market rally to be a
convenient exit opportunity in weakening situations.
Faithfully,
John C. Tumazos, CFA
|
Copyright © 2008 John Tumazos Very Independent Research,
LLC
|
