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August 2, 2011 Dear Friend,
We cut our earnings estimates for Domtar
owing to a $53 per tonne cost escalation in the June quarter from June 2010
levels, which caused margins to fall short as costs rose faster than prices.
There is a risk we have carried this too far, owing to a $1.09 plant
writeoff and special costs of maintenance outages. We cut our price target
to $125 from $139 per share, perhaps too sharply, but it leaves 60% upsides
plus the $1.40 dividend payout. The moderate Domtar valuation and market
evolution to sugar pouches, tea bags and other food and pharma at a 35% to
38% fraction of the uncoated free sheet market serve to encourage us.
We are impressed at the very mild summer slowdowns in most markets we study. Chinese and global total aluminum and steel outputs made big records in June. The copper market appears to have absorbed the Cananea mine restart to a 182,000 tonne annualized throughput in the June quarter, as ore grade declines in Escondida, Antamina, Grasberg, Kennecott Utah and other important mines caused even bigger production losses. Global aluminum and nickel inventories continue to fall. U.S. steel output made annual highs in July in a counter-seasonal pattern. We believe accelerated output in Japan, auto inventory rebuilding, flood repairs in Pilbara, Queensland and the U.S. Midwest and tornado repairs in the U.S. Midwest and South all serve to strengthen manufacturing in the second half of the calendar. The stock market has put large manufacturing stocks on sale, fearing recession, and bargains abound both in base and precious metals. Happy hunting, where examples of companies trading at < 9 times estimated 2011 earnings include Domtar, Thompson Creek Metals, FCX, Anglo American, Xstrata, and Vale. Companies hovering close by include Century Aluminum, Mercator Minerals, Southern Copper (outside our coverage) and a few others. Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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