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November 17, 2011
Dear Friend, GoldCorp currently trades for a 69% premium to our NPV model value of $31.31 per share, while other four major gold companies trade for an average premium of only 10% at a $1,500 long-term gold price estimate. Another way to view GG’s premium is that their stock price reflects a 29.8% increase in production over our current estimates rising to 4.4 to 4.8 mm oz for 2015 to 2018 running to reserves run out in the 2040 time frame. Alternatively, GG’s current stock price anticipates a 17.6% improvement in production, gold price, cost per ounce, and byproduct prices and volumes categories simultaneously better than our estimates.
We have maintained our price target at $54 per share
and Neutral rating because the two dozen or so possible sources of
corporate business progress not reflected in our NPV models herein
are plausible. We would rather bet that Goldcorp expands Red Lake or
Cerro Negro more than we model, that Penasquito open pit or
underground or El Morro get bigger, that some of the one or two
dozen potential “neighbor” acquisitions prove fruitful or that our
byproduct credit price forecasts prove conservative for silver, lead
or zinc.
We evaluated Vale's future nickel operations as we visited three small companies in the Sudbury, Ontario mining district November 10th and 11th. In November 2010 Vale Inco announced it would close its its Thompson, Manitoba nickel smelter and refinery opened since March 1961 rather than meet 2015 sulphur dioxide requirements, and ship the Manitoba material to $2.4 billion the Long Harbour hydromet refinery to open in Newfoundland in 2013.
Vale Inco plans to exceed 2015 sulphur dioxide emissions cuts to reach 30,000 instead of the 66,000 tonnes or less required cut from the recent 176,000 tonne annual maximum sulphur dioxide emission at Sudbury, Ontario. Vale Inco will spend $1.5 to $2.0 billion to replace the existing five flash converters with four new ones with very tight fitting hoods, much ducting to prevent gases venting the roof, a cooling tower and extra sulphuric acid tanks. The plan is a 98.5% cut from peak SO2 emissions in 1970 near 2 mmt. Vale rejected a hydromet technology at Sudbury to replace existing facilities to reach zero emissions as it would not recover PGMs, gold, silver and cobalt.
Vale’s five-year Sudbury capital program includes $360 mm investments in the Totten underground mine, $200 mm to upgrade Clarebelle mill floation and other outlays to total $3.4 billion prior to likely spending $375 mm to “back into” 51% of Quadra FNX Mining’s Victoria Mine, or $6.2 billion in Sudbury plus the new Newfoundland refinery. As noted, the $2.4 billion Long Harbour nickel refinery in Newfoundland is scheduled to operate in 2013. Thus, total capital commitments appear near $6.2 billion prior to considering normal “stay in business” outlays in Manitoba or Newfoundland and any early stage investments should underground mining in Newfoundland proceed.
We continue to estimate Vale’s corporate total nickel volumes grow from 297 mm lbs in 2011 to 447 mm lbs by 2020, but are more confident in those estimates which also include expansions in New Caledonia, Brazil and Sulawezi but exclude promising exploration in Mozambique. Vale’s nickel output outside of Canada should rise from 78 mm lbs in Sulawezi, Indonesia in 2010 and about the same in 2011 to 284 mm lbs by 2020 from Indonesia, New Caledonia and two mines in Brazil. We expect Sudbury, Ontario and Thompson, Manitoba outputs to be steady near 88 and 30 mm lbs annually after 2013, and for Voisey’s Bay to decline from 75 to 40 mm lbs as the open pit depletes. The Totten and likely 51%-owned Victoria mines and the processing of Quadra FNX Mining’s new output at Morrison give comfort that Canadian output should rise and not fall until the Ovoid pit depletion in Newfoundland in 2019. We estimate direct cash production costs at $6 per pound of nickel through 2018 rising to $7 per pound in 2019 and 2020 as the low cost Ovoid open pit winds up In mid-October we were the only traditional mining analyst from the U.S. on the Vale met coal tour in Mozambique. We are sure that the Portugese-speaking Brazil or emerging markets specialists who predominantly cover Vale would not trek to Sudbury, Ontario to visit Quadra FNX Mining, Pacific Northwest Capital's "River Valley" palladium project or North American Nickel to learn how things are going. We believe Vale makes good business progress on many fronts, and is a fine value at five times current earnings or just over 60% of our $41 price target. Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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