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August 25, 2010 Dear Friend,
We raised our price
target to $74 from $56 and our investment rating to
Overweight for Rio Tinto, putting us at Overweight or
"Buy" for all six major diversified mines, owing to its
much stronger than expected iron ore earnings, loss
avoidance in aluminum and better than expected net
income. In fact, Rio Tinto earned 10% more than Vale,
who mines up to 40% more iron ore, owns up to 80% more
of its production and has a minimal drag from aluminum
or acquisitions. We were most impressed that Rio Tinto realized
$35 per tonne more for the iron ore that it sold in the
first half than Vale. Our use of an 8.5% discount rate,
just a 1% terminal growth rate and $80 per tonne
long-term iron ore price are each are conservative
valuation metrics in view of U.S. thirty year treasuries
near 3.7% or Teck's recent 6.00% thirty year bond.
Most ironically, Rio
Tinto's shares have sold off about 20% in the past
quarter and nearly 10% in the past week, despite the
fine performance, owing to investor cyclical worries
amplified by the 10% drop in July global steel output
from April records and Rio Tinto's dependence upon iron
ore from $4.1 billion of its $5.85 billion net income
net of various unallocated overheads.
Separately, we wrote
about Klondex Mines' Fire Creek "blind" 2.2 mm oz gold
deposit grading about 0.3 oz per ton or 10 grams per
metric tonne or 10 parts per million. We encourage you
to look at the photos, as Fire Creek looks less
remarkable than most other Nevada hill sides. It lies
four miles due west of downtown Crescent Valley, 20
miles south of I80, 8 miles south of the former Newmont
Mining/Santa Fe Gold "Mule Creek" deposit and about 15
miles west and within eyesight of Barrick Gold's Cortez
Hills, Pipeline and South Pipeline deposits. We did not
build financial models of Klondex Mines pending
confirmation or much more data on permits, ore grade
verification, metallurgy, toll processing terms and toll
processing duration.
We believe the Fire
Creek "blind" (no gold on surface) discovery suggests
there are hundreds of millions of ounces of gold yet to
be found in the tens of thousands of folds and faults
visible across the mountains of Nevada. Many new
companies will emerge, and Barrick Gold or Newmont
Mining may have better reserve replacement experience
than most of us anticipate.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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