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April 25, 2011 Dear Friend,
Each successive M&A transaction
reinforces a consensus of booming global growth prospects and a shortage of
suitable reinvestment alternatives as quality mineral resources are scarce.
We recall a 1981 conversation thirty years ago at Oppenheimer & Co., Inc.
with arbitrage partner Jeff Tarr, who explained that each mining company was
a "unique Rembrandt" after Chevron bid $78 per share for Amax Inc. Cyprus
Minerals ultimately paid one-fourth that sum a decade later after moly
prices retreated towards $3 from $30 records. Barrick Gold's C$7.3 bid for
Equinox's mines in Zambia and a development project in Saudi Arabia, Rio
Tinto paying $700 million to accept a one-half expropriation re-sold to Vale
for $2.5 billion in Guinea, Mercator Minerals paying C$195 mm or 36% of a
feasibility study NPV for a moly project in Mexico and Capstone Mining
paying the majority of pre-feasibility study NPV for Far West Mining's
Chilean copper-iron ore-gold project all reflect (1) a rush to grab hold of
remaining resource projects and (2) strong confidence in global economic
growth.
While gold and silver prices made new records on April 25th, the shares of most emerging gold and silver mines fell today. Barrick Gold, the largest potential acquirer, cast a C$7.3 billion vote in favor of the copper market. It also was a vote against Barrick Gold's next development project alternatives, 50%-owned Donlin Creek in Alaska and 75%-owned Cerro Casale in Chile. Barrick expects a 3.5% pretax cost of debt to fund the acquisition, and immediate accretion. Feels like the company is tired of endless engineering study permutations and updates, environmental permitting and new capital cost increases. The majority of emerging gold stocks sold off today. The earnings reports of Forest Products companies, where selling prices gains pale in comparison to gold or copper or met coal, document rising costs. We cut Temple-Inland to Neutral from Overweight, our price target to $28 from $22 per share and our 2011 earnings estimate by $0.82 per share as costs rose enough to squeeze containerboard margins by $11 per ton, and lower prices, rising costs and soft volumes plague its Building Products unit. Temple-Inland's results could be a "template for stagflation" if crude oil is firm and U.S. interest rates finally rise. It is very possible that metals companies suffer margin erosion and earnings shortfalls due to rising costs, especially at A$1.07 and $112 crude oil.
Last week the International Aluminum
Institute reported global output 700 mtpd below the February 2011 record
rate, the World Steel Assn. reported a record March 2011 global output rate
even with a small dip in China and the World Bureau of Metals Statistics
reported February nonferrous metals demand and supply data that we watch
closely. The April 20th report of the World Bureau of Metals
Statistics revised downwards its January demand data for China by 48,500
tonnes for copper, 8,100 for nickel, 71,300 for lead and 53,400 for zinc.
Notwithstanding, it reported January-February global demand up 5.8% for
copper, 28.5% for nickel, 10.4% for lead and 6.5% for zinc with China the
strongest region.
This report contains several pages of
discussion on each major metals commodity, and about a dozen spreadsheets we
update regularly to stay abreast of markets. You may extract the several
pages on a particular commodity as a sort of current thesis that we update
with monthly supply-demand statistics as updated last week.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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