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Dear Friend,
We estimated Anglo American's second-half
costs fall 11% for met coal, 1% for thermal coal, fall 8% for copper and 8%
for iron ore from the elevated first-half cost levels that rose 20% to 40%
from the first-half 2010 levels. Even with improvements, cost escalation has
been large due to the lower copper grades, weak dollar causing resource
currencies to strengthen, energy, labor and other mining inflation, etc.
Fortunately, net debt has fallen $4.5 billion in the past 18 months and cap
ex did not rise as quickly as at many other companies, and a $3 per share
improvement in the NPV from lower net debt offset $6.50 of damage from
higher costs to derive a $32 price target at an 8% discount rate and 1.1%
terminal growth factor. We cut earnings estimates by 7% to 12% for various
future years due to the higher costs.
We rate the stock Overweight, and are encouraged by the 60% planned unit growth to 2013 led by nickel and copper projects just entering production. Faithfully
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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