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November 2, 2011 Dear Friend,
We raised our price target to $145 from
$125 per share because Domtar has bought back even more shares more quickly
than expected, and raised earnings estimates accordingly. We want to
emphasize our analysis is conservative including a 2% secular decay rate,
despite free cash flows, and an 8% discount rate. We believe the emphasis on
sugar packets, tea bag pouches and other food/pharma items for 35%-38% of
the uncoated free sheet market priced near $2,500 not $947 per ton is a
major plus worth a premium. Domtar also sells pulp and make the "Attends"
adult diaper or incontinence acquisition into an end market with favorable
demographics.
Separately, we write from Phoenix after spending the evening with FCX prior to visiting the large Morenci, AZ copper mine tomorrow. The Grasberg mill in West Papua, Indonesia has been COMPLETELY SHUT DOWN since October 25th due to road blocks, vandalism to the concentrate pipeline leading to the port and civil disorder. Indonesian authorities have elected to minimize the use of force, seeking to avoid human rights complaints and behave like a moderate democracy. FCX is helpless, as it made its generous offer of a 30% pay raise for workers like truck drivers already paid $21,000 annually plus lavish housing, food, health care, education and family support benefits for 11,000 employees and 11,000 contractors. Worker demands equate to $170,000 in annual pay. THIS DISRUPTION TO WORLD COPPER MARKETS IS LARGER THAN TRAGIC OCTOBER 6, 2003 PIT WALL COLLAPSE, where FCX then continued to enjoy about 15% of its mill throughput from underground mining without complete 100% mill shutdown 8 years ago. WE ESTIMATE THE COPPER PRICE WILL BE $1.00 PER POUND STRONGER THAN OTHERWISE EACH 90 DAYS OF OUTAGE, where the foundation could be laid for $7 future copper prices if this continues. There will not be a solution to the situation until the striking workers get hungry, run out of money and accept FCX's offer. FCX is conducting waste stripping at almost half its normal mine tonnage daily rate, mill maintenance and other activities that do not require mill operation. The message of the field trip involves the delineation and increased production of MILL GRADE ORES at Morenci, where the mill is being expanded from 56,000 to 125,000 tons per day. FCX emphasized the mill grade exploration potentials, where three recent intercepts in "southwest deeps" include 1,237 meters of 0.34% copper + 0.028% moly, 655 meters of 0.52% copper and 0.041% moly and 152 meters of 0.13% lower copper + 0.059% higher moly values. It has drilled 615 holes or 359 km at Morenci since the FCX and PD merger in March 2007 to add 8.3 billion pounds of copper and 100 mm lbs of moly reserves. Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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