September 26, 2011

Dear Friend,

We cut several of our nonferrous metals price forecasts for 2012 to reflect a "slow or no" growth outlook globally. These are not "recession" prices, but rather twice the 2009 average lows for copper, gold, silver and met coal and 50% above 2009 averages for nickel and aluminum. We will cut earnings estimates for particular stocks one-by-one as we review companies in detail. We do NOT expect to cut investment ratings, issue "sell reports" or issue particular warnings as we believe most cyclical stocks are dramatically undervalued both prior and after the recent selloffs owing to severe investor worries or anxieties. We will ride out the storm, and there is a reasonable chance that the fears are worse than what unfolds. We draw no comfort from a variety of "calm" or even bullish metals statistics reported last week, such as record August aluminum output or a 0.8% drop in world copper mine output YTD to July, as the really bad news unfolded 3 to 6 months after Lehman failed in 2008.

We summarized our notes from meeting ABX management in Denver and our September 22nd site visit to the Cortez Hills, Red Hill, Goldrush and other zones at the Cortez mine in Nevada on September 22nd. Our reductions to our ABX earnings estimates for 2011 and 2012 were cumulatively $3.10 per share from lower gold prices, and we did not change our $75 per share price target raised with higher gold prices and the likely very large Nevada discoveries announced September 7th. We are very encouraged at the continuous stratigraphy, grades and thicknesses in the "Winman Limestones" between Red Hill, Goldrush and ET North.

We are concerned that Fortescue Metals is falling behind of some of the very fast timetables it has set for itself to expand to 155 mmt by December 2012, 255 mmt by 2015 and 355 mmt by 2017. It is very possible that its machinery suppliers or contractors or available labor pool cannot keep the pace. We estimated a one year delay in the output growth, with little gain in the June 2012 fiscal year, and a slower rate of spending financially as the contractors may not deliver on time. Much of the lesser volume impact appears to be favorably offset with higher than previously estimated iron ore prices where spot prices remain near $185 per metric tonne. We cut our earnings estimates for Fortescue Metals, cut our price target to $9 from $11 and maintained our Overweight rating.

We will be in Western Canada this week calling on companies in Calgary and Vancouver, and attending the Teck coal, rail and port field trip from the 26th to 29th. We postponed an October 5 to 8th trip to the Dominican Republic, which appeared less vital. We will attend the Vale trip to Mozambique on October 12-13, which also focuses on metallurgical coal.

Faithfully,

 

John C. Tumazos, CFA