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October 2, 2011 Dear Friend,
We maintained our $30 price target as we
cut our discount rate to 8.0% from 8.5%, as the exclusion of the Pakistan
project reduces the political risk profile. We cut earnings estimates due to
lower Esperanza output in 2011 and future Reko Diq exclusion and also with
lower near-term copper, gold and moly prices. However, the lower discount
rate and exclusion of Reko Diq cap ex offset the adverse impacts of lower
earnings and cash flow, and we did not revise our $30 price target or
Overweight rating.
We did not revise our cost projections, but note that the Chilean peso fell to 523.55 from an average of 465 prior to mid-September. Crude oil at $79 is below prior ranges nearer to $100 per barrel. It is possible that these are temporary levels, and may become costlier if recent recession worries subside. Labor strife, a three hour power outage last week and other inflation pressures caused us to stay with a $1.56 per pound direct cost estimate prior to byproduct credits for the time being. We will carefully review each company in great detail, as exchange rate shifts and lower crude oil benefit some companies. Australia, Canada, Brazil, South Africa, Chile and other resource currencies have weakened by up to 20% over the past month. Thus, Fortescue Metals and Vale, where we already estimated falling $120 per tonne iron ore prices for 2012 that have not materialized, have a good shot of an earnings estimate increase if we model current exchange rates, crude oil inputs or raise our iron ore price forecast. BHP Billiton, Rio Tinto, Alumina Ltd and other global mining companies have similar benefits. John C. Tumazos, CFA |
Copyright © 2008 John Tumazos Very Independent Research,
LLC
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