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January 23, 2012 Dear Friend,
We cut our price target for Rio Tinto to
$52 from $60 per share because (1) we cut our aluminum price estimates as
discussed in great detail in a separate report distributed Sunday, (2) we
cut our estimate of iron ore volumes sold by 3% for 2012 onwards due to
slower world economic growth and (3) we cut our "terminal growth" estimate
to 1.0% from 1.5% while staying at an 8.5% discount rate owing to the risks
to revenues associated with slower world economic growth rates.
We are concerned that world steel output rose 1% in November and 2% from December versus late-2010 levels, and that first-quarter Chinese steel output may be up to 10% less than 2011 and that first-quarter 2012 steel output outside of China may decline due to slowdowns in Europe. Fortescue Metals sold its December quarter 58% pure iron ore output for $122 per metric tonne, which suggests pricing risks to iron ore. While we did not cut our iron ore price estimates for Rio Tinto, which already are conservative at $100 per tonne, we cut volume estimates by 3% as surely Rio Tinto may have difficulty selling every tonne from the Pilbara or eastern Canada into soft markets. While we estimate $200 per tonne for 2012 met coal and $250 per tonne for 2013 onwards, we are alarmed that the shares of Walter Energy, Alpha Natural Resources and Patriot Coal each fell 10% to 20% in the past 60 days. Copper prices also are $0.27 below our $4.00 per lb estimate for 2012. Thus, there are risks to most lines of our Rio Tinto earnings model in the "revenues" lines. Its asset concentrations in aluminum and iron ore represent a "bad coincidence." BHP Billiton, for example, benefits from robust crude oil prices near $100 per barrel in contrast. Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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