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May 3, 2011 Dear Friend,
We raised our investment rating on
Agnico-Eagle to Overweight in part because of its modest, conservative
business approach. It plans to focus on its seven core properties in Nunavut
(2), Val d'Or in Quebec (3), Mexico and Finland. We cannot imagine it making
an acquisition in Zambia, in copper or in a size of $7.65 billion with
relatively quick study. We simulate it will build $4 billion in cash by 2018
and throw off $800 million or more in excess cash at moderate $1,200 gold
and $22 silver long-term estimates.
We cut our earnings estimates and our ABX price target to $56 from $60 incorporating Equinox, but we maintained our Overweight or Buy recommendation as we believe its shares are oversold in the past seven trading sessions. We incorporated a 25% renewed Zambian windfall profits tax above $3.00 copper, as the prior 75% windfall tax > $3.50, 50% > $3.00 and 25%>$2.50 copper was withdrawn in March 2009. We estimated a large stepup of depreciation due to the purchase price, and $225 million in new interest expense at 3.5% borrowings. Barrick believes Equinox could generate $1.0 billion in EBITDA prior to expansions and $1.5 billion afterwards, but amortization of purchase price, interest expense, existing Zambian taxes and new Zambian taxes could erase most of that. A 10% return of $0.8 billion may require $1.5 billion of pretax profit or $1.50 per lb of copper after amortization and interest expense, which may require nearer to $5 than $4 copper. We are pleased that Barrick put Equinox ahead of its Cerro Casale, Donlin Creek or Reko Diq potential projects under study or potential acquisitions of Northern Dynasty, NovaGold, Seabridge Gold, Exeter Resources or other low grade, large bulk tonnage, large cap ex projects. While Zambia or Saudi Arabia involve obvious political risks, Barrick avoided exposure to permitting delays, construction delays or costly cap ex cost overruns. John C. Tumazos, CFA |
Copyright © 2008 John Tumazos Very Independent Research,
LLC
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