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August 11, 2010 Dear Friend,
We are very impressed
that Teck sold thirty year bonds at 6.00% last week,
which has implications to the 7.04% to 9% discount rates
we use to value the large diversified mines, 7% to 8.5%
used for forest products and similar metrics across our
universe. Further, we deem Teck least strong among the
six large diversified mines owing to its least
diversification, large capital projects and the three
year volatility of met coal prices.
We held our Xstrata
discount rate at 7.5% and cut our long-term growth
estimate to 3% from 4% in response to the disclosed
merger discussions with Glencore a few months ago. We
do not know how to value traders or possibly one-time
trading profits in relation to Antamina, Collahuasi or
Las Bambas. We are afraid Glencore would seek a
particularly opportune time to "swap out." Thus, we
moderated our growth estimate in concern about who will
own the assets rather than the returns from Las Bambas,
etc. These contributed a $5 reduction in our price
target and lower earnings a $3 reduction as we cut our
target to $21 from $29.
We wrote a long
discussion on pp. 2-3 concerning options for Xstrata to
buy out Glencore's 34.4% stake without issuing Xstrata
debt. These include asset swaps other than core copper,
nickel or coal units, an Xstrata public offering or a
Glencore public offering of Xstrata shares.
Alternatively, a large merger like the Anglo American
proposal last year would dilute down Glencore towards
17%. We believe Xstrata's valuation might improve
without "the poor perception of Glencore" and with a
streamlining or simplification. Chrome, vanadium, PGMs,
lead, zinc or other small units may not benefit the
Xstrata valuation, and there is some appeal to us of a
more streamlined entity that is easier to understand and
manage.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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