September 6, 2010
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 September 6, 2010

Dear Friend,

·                     Despite strong performances this past week, we expect nonferrous metals shares to rally another 25% or more as consensus sentiment shifts away from economic slowdown and recognizes true copper market tightness.  The most timely buys this week are Teck, Xstrata, Alcoa, Antofagasta PLC, FCX,  Mercator Minerals, Duluth Metals, PolyMet Mining and outside of our regular coverage high grade copper deposits at Imperial Metals and Capstone Mining.

·                     LME aluminum, nickel, lead and zinc prices each rose 6.1% to 6.6% this past week, as copper lagged at 3.8%, palladium at 5.2% and silver 3.1%.  Base  metals continued firm in London on Sept. 6th.  Copper, palladium, gold and silver could set 2010 price highs any day.

·                     Four of the six major LME metals inventories fell this past week, with aluminum down 19,831, copper down 7,721 to 589,820 tonnes, lead down 750 and tin down 25 tonnes while nickel rose 1,494 and zinc rose 3,522 tonnes.  The four week moving averages of inventories register declines for copper, zinc and tin while rising for aluminum, nickel and lead.

*          We are raising our 2011 copper price forecast to $4.25 from $3.50, 2012 to $4.50 from $4.00 and staying at $5.00 in 2013-14 and raising to $4.00 from $3.50 for 2015 onwards.  We caution that $7 to $10 copper prices are conceivable if mine mishaps, renewed Chinese buying or a U.S. recovery were to develop. 

 

We will raise earnings estimates and price targets for individual copper and diversified mines one-by-one as we revise individual models.  We believe a TRUE COPPER SHORTAGE ALREADY HAS BEGUN, due to roughly unchanged 2010 supply and up to 8.3% demand growth.  While the World Bureau of Metals Statistics reports just 4.2% first half 2010 copper demand growth, a dozen major nations under-bought copper in the 2010 first half as they waited errantly for prices to fall deeply.  The table below compares GDP growth to reported copper demand, reinforcing our view that copper demand growth is nearer 8%.  Russia, South Africa, India, Malaysis, South Korea, Germany, China, Taiwan, Brazil, Mexico, Vietnam and Indonesia each had second-quarter real GDP growth of 6.4% to 18.8%.
 
Faithfully,
 
 
Table 3:  Real GDP > Under-Reported Copper Use
         
  2Q GDP  1H Copper Use  
Big Decliners        
France   1.7% -19.6%    
Russia   8.8% -9.3% CU Understated
Egypt   3.2% -89.5% CU Understated
South Africa 8.8% -26.5% CU Understated
India   8.8% -30.5% CU Understated
Malaysia   8.8% -16.1% CU Understated
South Korea 7.2% -15.9% CU Understated
Australia   3.3% -50.6% CU Understated
           
Big Gainers 2Q GDP  1H Copper Use  
Bulgaria   -1.5% 47.5%    
Germany 9.0% 22.4%    
Italy   1.1% 23.4%    
Poland   3.5% 30.5%    
Spain   -0.2% 16.1%    
Sweden   3.6% 17.2%    
United Kingdom 1.6% 139.5%    
China   10.3% 2.6% CU Understated
Japan   1.9% 32.8%    
Taiwan   12.5% 11.5%    
Thailand   3.8% 21.0%    
Vietnam   6.4% 28.5%    
Brazil   8.8% 61.6%    
U.S.A.   1.6% 3.5%    
         
Others          
Mexico   7.0% 3.8% CU Understated
Turkey   due 9/30 3.8%    
Indonesia 18.8% 0.5% CU Understated
EU   3.9% 12.1%    
         
Sources:  government reports for GDP and WBMS for cu use
 
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: 05/25/11

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