Lumber Liquidators Holdings

LL : NYSE : US$70.42

BUY 
Target: US$100.00

COMPANY DESCRIPTION:
Lumber Liquidators is the largest specialty retailer of hardwood
flooring in the U.S. The company offers premium hardwood
flooring products in a wide variety of domestic and exotic wood,
as well as engineered products, laminates, bamboo, cork, and
accessories. Lumber Liquidators assortment is largely comprised
of proprietary brands including the flagship Bellawood brand.

Consumer & Retail — Specialty Retail
MOMENTUM VANISHES IN Q2 PUSHING OUR ESTIMATES LOWER
Investment recommendation
We are lowering our Q2 EPS estimate from $0.94 to $0.61,
compared with guidance of $0.59-$0.61 and prior consensus of
$0.90. LL reported a Q2 SSS decline of 7.1% on top of +14.9%
versus expectations of +7%. Total customers invoiced declined
5% yr./yr., the steepest decline in three years. LL did not regain
momentum after difficult Q1 weather as we had anticipated, and
management is blaming macroeconomic factors. The 131 stores
impacted by weather experienced a SSS decline of 13%, with
non-impacted stores -2%. We are lowering our FY14 EPS
estimate from $3.35 to $2.70 on SSS -2.5% on top of +15.8% (we
had previously forecast +6.3%). We still project double-digit sales
and EPS growth over the long term, keeping us BUY rated. Given
consecutive quarterly EPS misses and limited near-term visibility,
we think investors will view LL as a show-me stock over the next
few months.
Investment highlights
 An inventory shortfall accounted for $18MM of Q2’s $47MM
revenue downfall versus our estimate. LL expects quality
assurance-related supply-chain issues to resolve in Q3.
 We are reducing our price target from $122 to $100 based on our discounted free cash flow model. This is a long-term target, and reflects our belief that LL’s model of better selection, service, and value should enable it to take market share

Arch Coal Expansion Halted At Supreme Court

Global Warming Texas
In a landmark decision on Friday that could have far-reaching implications for federal coal leasing, a U.S. District Court judge ruled against the expansion of Arch Coal’s West Elk mine in Colorado for failure of federal regulators to consider the social cost of carbon in their environmental review.
The decision issued by Judge Jackson of the U.S. District Court in Colorado found that the Bureau of Land Management and the Forest Service overlooked the costs of carbon emissions from the mining and combustion operations associated with the mine’s expansion even though the agencies acknowledged that expanding West Elk’s operations would likely result in greater greenhouse gas emissions.
Friday’s ruling is the result of a challenge brought by environmental groups contesting three agency decisions on the Colorado Roadless Rule and expansion of the West Elk mine in the Sunset Roadless Area. This region is a part of the treasured North Fork Valley backcountry in western Colorado which abuts the iconic West Elk Wilderness and is a destination for hikers and hunters and habitat for the threatened lynx.
The agencies’ decisions would have permitted Arch Coal to expand the West Elk Mine into 1,700 acres of the Sunset Roadless Area, the bulldozing of six miles of road, and the construction almost 50 well pads for the venting of methane from the mine expansion. Methane is a potent greenhouse gas and the second-most prevalent GHG emitted in the United States after carbon dioxide.
According to the decision, the BLM and Forest Service initially found that the social cost of carbon associated with the expansion could be as high as $984 million, but the agencies arbitrarily scrapped this analysis from the final environmental impact statement. However the associated benefits of the project were still included in the agencies’ analysis. The court called this error “more than a mere flyspeck.”
The ruling goes on to acknowledge that agencies are required to analyze the effects of their actions on climate change. The court noted that the BLM and Forest Service “acknowledged that there might be impacts from GHGs in the form of methane emitted from mining operations and from carbon dioxide resulting from combustion of coal produced,” and “this reasonably foreseeable effect must be analyzed.”
The decision was issued just in time before Arch Coal’s exploration activities were set to begin on July 1, and stops the expansion of the West Elk coal mine and any associated surface or below-ground activity, including bulldozing or construction, for now until the parties can agree on how to move forward.
Expanded coal leasing in the American West, particularly the coal-rich Powder River Basin in Wyoming and Montana, has been a hotly contested issue in recent years, with parties raising significant concerns over the climate effects of burning the coal mined in the region.
This court’s decision reminds agencies to consider climate impacts when making decisions affecting federal lands.

HudBay Minerals Update

HBM : TSX : C$8.81
BUY 
Target: C$12.00

COMPANY DESCRIPTION:
HudBay Minerals is an integrated Canadian zinc and copper producer with operating assets in Manitoba, and development or exploration properties elsewhere in Canada, in the U.S., and in Peru.
All amounts in C$ unless otherwise noted.

Metals and Mining — Base Metals and Minerals
2013 PRODUCTION A LITTLE WEAK, BUT 2014 GUIDANCE IN LINE AND CONSTANCIA ON TRACK
Event
HBM on January 8 released 2013 production and 2014 guidance. 2013 copper production’s miss against guidance is the aberration. 2014 production guidance is consistent with our forecasts. HBM confirmed Constancia’s budget and schedule, and provided surprisingly high 2014 production guidance (pre-commercial production) of 5,000-10,000 tonnes.
Impact
Our revised 2013-15E EBITDA forecasts are C$23 million, C$129 million, and C$485 million, which compare to our previous forecasts of C$32 million, C$129 million, and C$485 million. Our revised 2013-15E adj. dil. EPS forecasts are C$0.03, C$0.16, and C$1.08, from previous forecasts of C$0.07, C$0.15, and C$1.08.
Action and valuation
We are maintaining our BUY recommendation and our 12-month target of C$12.00, which is based on the average of: i) 5x our 2015E EV/EBITDA, which would imply a share price of C$11.97; and ii) our NPV10 estimate of C$11.62, (which includes C$7.79 for Constancia).
Next potential catalyst and investment risks
We are forecasting Q4/13 adjusted diluted EPS of negative (C$0.02) based on: i) payable zinc and copper sales of 24,400 tonnes and 7,800 tonnes, ii) realized zinc and copper prices of US$0.93/lb and US$3.31/lb (before treatment and refining charges, but after provisional pricing adjustments), and iii) after by-product credit costs of +US$1.41/lb of copper.

Monsanto Company

MON : NYSE : US$115.12
BUY 
Target: US$135.00

COMPANY DESCRIPTION:
Monsanto is a leading global provider of seeds, biotechnology traits, and glyphosates. The company operates two segments: Seeds and Genomics and Agricultural Productivity. The seeds and genomics segment consists primarily of soybeans, corn, cotton, and vegetable seed brands, as well as biotechnology traits that help control weeds and insects. The agricultural productivity segment consists of crop protection, including glyphosates.
All amounts in US$ unless otherwise noted.

Agriculture — Biotechnology
Q1/F14 EPS BEATS; ANNUAL GUIDANCE UNCHANGED
Investment recommendation
We believe investors should continue to own the shares of Monsanto due to its solid product platform and its strong growth prospects, both near and medium term. We expect the company to capitalize on its next generation products in South America, increased market share across the Americas, and margin gains across its core products. The initial 3M acre Brazilian launch of Intacta bodes well for a sales trajectory (product adoption) over the next few years. The expected launch into Argentina in 2015 should only augment that product’s positive outlook. We expect the Integrated Farming System segment to add a boost to the company’s earnings profile over the medium term. It is an intriguing business that rounds out their product offerings, a business that should offer investors continued share pricing gains in the years ahead as the business is rolled out and gains traction.
Investment highlights
 Monsanto reported adjusted Q1/F14 EPS of US$0.67 versus our estimate of US$0.63, and consensus of US$0.64. The results were mildly better than expected due to higher Agriculture Productivity gross profit, partially offset by higher opex. Total gross margin was reported at US$1.56 billion, above our US$1.38 billion estimate (Figure 1), while operating costs were US$1 billion versus our expectation of US$0.87 billion. The company confirmed F2014 EBITDA guidance at US$4.65-4.80 billion and F2014 EPS guidance of US$5.00-5.20, versus our estimate of US$5.13 and consensus of US$5.27.
Valuation
We continue to rate the shares of Monsanto a BUY, but have increased our target price to US$135.00 (from US$124.00 previously), based upon a 22.5x multiple to our F2015E EPS

Rio Tinto plc Expansion Plans

RIO: 3140p
Buy
Target: 4000p

Basic Resources – Mining – General Mining
Iron ore mine expansion to 350Mt unveiled
What’s new?
Rio Tinto management have outlined the route to fill the bulk of the 360Mt logistics capacity currently being developed A mix of brownfield expansions at various mines plus new greenfield mines at Silvergrass and, in the latter part of the decade, Koodaideri. Management is targeting 330Mt ore production in 2015 from with 350Mt capacity by 2017.
Impact 
Our current estimates had assumed that management would fill the new transport capacity on roughly this timetable. Our current assumptions see the Pilbara produce 282Mt in 2014 rising to 321Mt in 2015 and plateauing at 348Mt in 2017. We had assumed a RIO share of capex of US$6.6B to develop this mine output.
The volume estimates are broadly in line with the comments from management.
We had assumed that the mining capital cost intensity would be ~US$95/tonne on top of a logistics cost intensity of ~US$50/tonne. From the comments from RIO this morning the capital cost intensity of the mining assets looks to be ~US$70 – 80/tonne or 15 – 25% lower than the earlier estimate. This, all else equal, should mean net we can expect improved cash returns on cash invested from RIO over the latter part of the decade further bolstering its appeal.
Valuation
We retain our BUY recommendation and 4000p 12 month price target. We derive our price target using a mix of EV/EBITDA, P/CFPS and NAV based methodologies.
The main risk to our view is lower than expected iron ore prices. The announcement gives us increased confidence in our production forecasts for RIO through the next few years, increasing our conviction that the volume growth to
be delivered will drive falling EV/EBITDA mutliples and a rising dividend yield, underpinning RIO’s attractive current valuation.
Share performance catalyst
The next catalyst we expect is the investor presentations on Dec 2 (Australia) and Dec 11 (UK). After this we expect an agreement with the Mongolian government allowing underground development to restart will be the next operational catalyst.

VALE Update : Target Price Now $17.50

VALE : NYSE : US$14.76
BUY 
Target: US$17.50

COMPANY DESCRIPTION:
VALE is the largest seaborne exporter of iron ore and the world’s second largest nickel producer. The company also
produces copper, precious metals, manganese, ferroalloys, potash and other fertilizers, and has a large logistics business. The majority of operations are in Brazil and Canada.
All amounts in US$ unless otherwise noted

Metals and Mining — Senior Diversifieds
VALE SETTLES BRAZILIAN TAX ISSUE, REMOVING THE VALUATION OVERHANG
Event
Vale announced its participation in the federal tax settlement (REFIS) in Brazil for payment of amounts relating to net income of its non-Brazilian subsidiaries from 2003 to 2012. Participating in the REFIS will result in income tax payments of R$6bn at the end of November and R$16.4bn payable in 179 monthly installments.
Impact
Our revised 2013/14 adjusted EPS forecasts of US$2.69 and US$2.21 compare to our prior estimates of US$2.72 and US$2.30. Our revised 2013/14 EBITDA forecasts of US$22.0 billion and US$19.8 billion compare to our prior estimates of US$22.1 billion and US$19.8 billion.
Valuation
We are maintaining our BUY recommendation but decreasing our target price to US$17.50 (from US$18.50). Our US$17.50 target price is based on the average of: i) 6x our 2014E EV/EBITDA, which would imply a share price of US$18.35, and ii) our NPV10 estimate of US$16.55.
Next potential catalyst / Key risk
Vale noted that the tax payments will be funded from operating cashflow, without requiring additional debt financing. Given our current commodity price and operating and capex forecasts, we believe that additional financing may be required by 2015. However, we expect a full update of operating and capex guidance as part of Vale Day at the NYSE
on December 2.

Goldman Sachs Forecasts Multiple Commodity Drops – Gold to $1000

The risks are strongest for iron ore and follow increases in supplies, analysts including Jeffrey Currie wrote in a report yesterday that identified the New York-based bank’s top 10 market themes for the coming year. Price pressures will mostly become visible later in 2014, the analysts wrote, forecasting that bullion, copper and soybeans will decline to the lowest levels since 2010.

Commodities tracked by the Standard & Poor’s GSCI Index lost 5 percent this year, led by corn as supplies surged, and precious metals on expectations the Federal Reserve will taper stimulus. Goldman described the forecast losses for iron ore, gold, soybeans and copper as significant, and said that they could help weaken currencies in producing countries, including the Australian dollar and South African rand.

“Last year, we pointed to the ongoing shift in our commodity views, ultimately towards downside price risk,” the analysts including Currie wrote. “The impact of supply responses to the period of extraordinary price pressure continues to flow through the system.”

Gold, which was at $1,245.90 an ounce on the Comex at 4:33 p.m. in Singapore, will drop $1,050 at the end of next year, Goldman said in the report, restating an earlier forecast. Currie said last month that gold is a “slam dunk” sell for next year as the U.S. economy extends its recovery.

Annual Drop

Bullion is headed for the first drop since 2000 this year as investors cut holdings. Futures lost as much as 2.6 percent yesterday after the Fed signaled that tapering may start in the months ahead, according to minutes from its October meeting.

Soybeans are seen by Goldman at $9.50 a bushel by the end of 2014, from $12.7775 in Chicago today, while corn will retreat to $3.75 a bushel from $4.255. Copper will drop to $6,200 a ton from $6,989.25 on the London Metal Exchange.

A global seaborne iron ore surplus will emerge next year as supply increases over the second and third quarters, Goldman Sachs said in a separate report last month. Prices will average $108 a ton in 2014, it said in the Oct. 18 note. The raw material averaged $135 this year at Tianjin port in China.

While downside risks for energy prices will increase next year, the outlook is more stable than for iron ore, gold and copper, Goldman said in yesterday’s report. Brent crude is seen at $105 a barrel at the end of 2014 from $108.01 today.

U.S. Recovery

“We expect the long-awaited shift towards above-trend growth in the U.S. finally to occur, spurred by an acceleration in private consumption and business investment,” the Goldman analysts wrote yesterday. At the Fed, “we expect a gradual tapering in bond purchases to begin, most likely in March.”

VALE Target $18.50

VALE : NYSE : US$16.18
BUY 
Target: US$18.50

COMPANY DESCRIPTION:
VALE is the largest seaborne exporter of iron ore and the world’s second largest nickel producer. The company also produces copper, precious metals, manganese, ferroalloys, potash and other fertilizers, and has a large logistics business. The majority of operations are in Brazil and Canada.
All amounts in US$ unless otherwise noted.

Metals and Mining — Senior Diversifieds
Q3/13 FINANCIAL RESULTS; SLIGHTLY BELOW OUR EXPECTATIONS
Event
Vale reported a headline Q3/13 EPS of US$0.68 and an adjusted EPS of US$0.72, slightly below our estimate of US$0.74. As a better measure of performance against expectations, adjusted EBITDA of US$5.8 billion was lower than our forecast US$6.1 billion.
Impact Our revised 2013/14E adjusted EPS forecasts of US$2.72 and US$2.30 compare to our prior estimates of US$2.73 and US$2.45. Our revised 2013/14E EBITDA forecasts of US$22.1 billion and US$19.8 billion compare to our prior estimates of US$22.0 billion and US$21.1 billion.
Valuation

We are maintaining our BUY recommendation but decreasing our 12-month target price to US$18.50 (from US$20.00). Our US$18.50 price target is based on the average of : i) 6x our 2014E EV/EBITDA, which would imply a share price of US$18.59, and ii) our NPV10 estimate of US$18.56 (from US$20.16).
Next potential catalyst / Key risk
We are forecasting Q4/13 adjusted EPS of US$0.74, and adjusted EBITDA of US$6.1 billion, based on iron ore and pellet sales volumes of 78.0 million tonnes and 9.5 million tonnes, and iron ore and pellet realized prices of US$103/t and US$140/t. We note that disputes regarding tax reassessments for 2001-2008 remain unresolved. Vale’s investor day is scheduled for December 2 in New York, where we expect the release of guidance for 2014.

Joy Global : Less Joy

Joy Mining Machinery Founder Joseph Francis Joy

Joy Mining Machinery Founder Joseph Francis Joy (Photo credit: Wikipedia)

Joy Global (JOY : NYSE : US$49.16), Net Change: -2.15, % Change: -4.19%, Volume: 7,519,489
Joy Global, a maker of mining equipment, reported a 36% slide in quarterly orders and warned of
sharply lower revenue for a further year as coal producers cut back capital spending in the face of a supply glut and low prices.
Net income fell 5% to $183.2 million, or $1.71 per share. Revenue dropped 5% to $1.32 billion.

Excluding items, Joy Global earned $1.70 per share while analysts expected earnings of $1.37 per share, excluding items, on revenue of $1.18 billion. Joy Global maintained its 2013 forecast for earnings of $5.60-5.80 per share.

The company, which derives two-thirds of its revenue from sales to coal miners, said it would increase cost cutting to offset the slide in orders. Management maintained its forecast of revenue for the year to October 2013 of $4.9-5.0 billion, down from last year’s $5.66 billion, and it warned the following year would be worse.

“The current outlook (for 2014) is unlikely to support annual revenue above $4 billion,” Chief Executive Mike
Sutherlin said in a statement. This is sharply lower than the previous average expectation from analysts for revenue of $4.57
billion for the year ending October 2014.

Novus Energy : China Connection ? Jack A. Bass Managed Accounts

Novus 2

Novus 2 (Photo credit: Wikipedia)

Novus Energy* (NVS : TSX-V : $0.86)
Chinese buyers emerge? The Hong Kong Economic Times reports that China-based Yanchang Petroleum International Ltd.
plans to acquire Novus Energy for C$500 million (or ~C$2.00 per share). At the time of this writing, Yanchang shares remain
halted in Hong Kong and Novus was halted on the TSX Venture Exchange. Recall, Novus reported Q2/13 results last week and commented on its ongoing value maximization process.

The company confirmed that it is currently in exclusive negotiations with respect to a potential transaction. In that regard, Novus received an order of the Court of Queen’s Bench of Alberta, as well as confirmation from the TSX Venture Exchange, that it may delay its annual general meeting of shareholders until October 24, 2013. This may save the company the expense of holding an additional meeting, should the company undertake a transaction which requires shareholder approval. On December 4, 2012, Novus announced that it had retained financial advisors to assist the Special Committee of the Board of Directors in exploring and evaluating a broad range of options to optimize shareholder value. The company cautions that there can be no assurance that a potential transaction will result from the current negotiations, and Novus does not intend to disclose future developments with respect to the process unless and until the Board of Directors has approved a specific transaction or otherwise determines that disclosure is appropriate or required.

Novus’ Q2/13 production averaged 3,452 boe/d (80% liquids) falling short of Canaccord  forecast of 3,844 boe/d and consensus of 3,939 boe/d. Production was down 15% quarter-over-quarter due to weather conditions which adversely affected its field operations. Second-quarter CFPS of $0.07 was commensurately below Toth’s estimate and consensus of $0.08 given reduced production volumes.

The company has ramped up activity in Q3 with current production of 4,050 boe/d. Subsequent to June 30, Novus has drilled an additional 17 wells in the Dodsland area with continued focus on well costs that have averaged ~$875,000.

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