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April 18, 2011 Dear Friend,
Metals stocks have sold off pretty badly
during the past week, and even gold and silver shares plummet despite
today's record gold and 31-year-high silver prices. We are reminded of
October 23, 1987, "Terrible Tuesday," when gold shares fell almost 30% even
though gold bullion prices kept rising another two months to December 1987
highs near $500 per oz.
Last week total exchange inventories rose
29,942 tonnes as lead rose 16,512, zinc rose 38,873 and tin rose 265 tonnes
to overwhelm a 24,387 tonne aluminum, 1,052 copper and 744 tonne nickel
decline. No seasonal peak has been evidence other than in nickel inventory
declines.
Chinese aluminum and steel outputs per
day fell 1% to 2% in March from February strong levels. We expect February
nonferrous demand and supply data from the WBMS on Wednesday April 20 as
well as the March output data from the World Steel Assn. and International
Aluminum Institute.
We estimate that Antofagasta PLC pays
Duluth Metals $1.43 billion in cash at year-end 2013 to increase Antofagasta
PLC's stake in the Nokomis polymetallic deposit to 65%. Further, it would be
logical for Antofagasta PLC to buy out its partner in its entirety at that
point in time to enjoy that 25%, the final 35% and the 100%-owned
exploration properties such as Nickel Lake. We do not expect Antofagasta PLC
to attempt such a buyout prior to completion of definitive feasibility study
nor some good initial permitting progress, which pushes out the time frame
to the end of 2013 at the earliest.
We simulated a $2 billion cap ex on a
100% basis for an 80,000 metric tonne per day mine gradually starting in
late-2017 and reaching design capacity in 2021. We estimate that Duluth
Metals could earn almost $5 per share in 2021 or 2022 at $4 copper, $9
nickel, $1,200 pt and au, $750 palladium, $22 silver and $16 cobalt. For
these reasons a $3 billion takeover value eventually remains credible, and
we raised our price target to $15 from $13. Separately, several months ago
we raised our Antofagasta PLC price target to $33 from $25 per share
primarily due to its benefits from the Nokomis venture with Duluth Metals.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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