|
|
|
|
May 8, 2011 Dear Friend,
We raised our price target for Vale to
$49 from $44, raising our iron ore price estimates, and cut our cap ex and
acquisitions estimate to $18 from $24 billion as Vale suffered delays to
four projects and spent less than expected at $2.7 billion in first-quarter
cap ex and $2.7 billion in announced acquisitions in Brazil and Zambia
through May 5th. All major iron producers had production setbacks in the
March quarter, and fell well short of the 8.8% gain in global steel output
to strengthen the near-term iron ore outlook as stockpiles of iron ore and
met coal were depleted.
We raised 2012 and 2013 and cut 2011 and 2014 onwards earnings estimates for Teck, where we maintain a $95 target and Overweight rating. Increases to $300 from $250 per tonne estimated 2012 and 2013 met coal prices offset cuts to $0.80 per lb long-term lead and zinc prices. We believe global steel output will be firm in 2012 with Japan rebuilding, slow rebounds to North America and the EU from 2009 lows and global growth. We estimated $0.80 down from $1.00 long-term lead and zinc prices owing to near record exchange inventories owing to illegal Chinese lead-zinc smelters and the incentives of $30 to $50 silver prices on such polymetallic mines. We cut our earnings estimates for HudBay Minerals, cut our price target to $19.50 from $26 and cut our investment rating to Neutral from Overweight. We cut our long-term zinc price estimates to $0.80 from $1.00 due to near record inventories, high silver prices and likely large amounts of illegal and unreported Chinese lead and zinc mines and smelters. We had more enthusiasm for the small 2% to 5% copper intercepts plus coproducts enjoyed in Manitoba with partner VMS Ventures and less enthusiasm for spending over $1 billion on low grade massive ores in Peru. Most important, other stocks like Anglo American, Vale, Domtar or others trade near 6 to 8 times current 2011 earnings, which reduces the incentive to wait and see how HudBay improves its projects. We cut our price target to $22 from $27 for Norbord and our earnings estimates due to very weak U.S. housing starts and below-expectation OSB prices. There is no assurance this will be our last earnings estimate cuts, as low housing starts, rising input costs or potential escalations to interest rates all pose risks. Notwithstanding, our DCF model forecasts a generous $22 price target owing to low forecast cap ex, an 8% discount rate and 1% terminal growth estimate. Brookfield Investments owns 52%, suggesting a shareholder orientation, and product price upside exposures are large from current levels should an employment recovery benefit housing in 2012. Thus, we remain at Overweight. There will not be a Spot Markets report over this weekend, despite the plunges in prices worthy of comment this past week, as I am off to my son's college graduation. Will be back in the office on Wednesday. Faithfully,
John C. Tumazos, CFA
|
Copyright © 2008 John Tumazos Very Independent Research,
LLC
|
