Miners Sector 2015 Forecast :Dumping Assets At Fire-sale Prices

Senior mining companies are still holding many unnecessary and troubled assets on their books. So it would not be a surprise to see a few more dirt-cheap deals in 2015.

Scott Douglas/Riversdale Mining Ltd.Senior mining companies are still holding many unnecessary and troubled assets .

The junior mining sector is in such brutal shape right now that most companies are unwilling to even pay for booths at conferences that are geared to them.

 

Mr. Dethlefsen’s firm, Corsa Coal Corp., was approached this year about buying coal assets in Pennsylvania from Russian steel giant OAO Severstal, which was bailing out of the United States.

Severstal had bought these operations for $900 million in 2008, when steelmaking coal prices were hitting all-time highs. Mr. Dethlefsen would not pay anything close to that in today’s awful coal market, but he didn’t have to. Corsa bought the operations for a grand total of US$60 million, or less than 8% of what Severstal paid.

“It’s a tough market. We have our work cut out for us with this business and it’s not going to be easy,” said Mr. Dethlefsen, Corsa’s chief executive.

“But we’d rather start by paying US$60 million than US$500 million.”

Indeed. It used to be that when mining companies put assets up for auction, they wouldn’t actually sell them unless they got a very full price. That could be because their commodity price assumptions were too optimistic, or they were just too attached to them and convinced they could extract more value. Dozens of interesting projects were put up for auction in recent years and never changed hands because sellers demanded too much money.

We have our work cut out for us with this business and it’s not going to be easy

That changed in 2014, especially at the low end. This will go down as the year when miners were happy to dump their troubled assets. They just wanted to get them off the books and make them someone else’s problem.

The Corsa-Severstal deal was one such example. Rio Tinto Ltd., another, sold coal assets in Mozambique for US$50 million, just three years after paying US$3.7 billion for them. Kinross Gold Corp. dumped Fruta del Norte, possibly the world’s richest undeveloped gold project, for US$240 million, or less than a quarter of what it paid six years ago.

A Billion Dollar Loss – and more of these stories to be written in 2015

And then there was the unfortunate tale of Alberta coal miner Grande Cache Coal Corp. A pair of Asian commodity traders (Marubeni Corp. and Winsway Enterprises Holdings) paid $1 billion for the company in 2011. But coal prices turned dramatically against them. So in October, they agreed to sell their Grand Cache stakes for a buck. Each.

These fire-sale prices generated some laughs across the industry. Yet the deals have an undeniable logic in the current volatile market conditions.

Handout/Grande Cache Coal

Handout/Grande Cache CoalA pair of Asian commodity traders (Marubeni Corp. and Winsway Enterprises Holdings) paid $1 billion for Grande Cache Coal in 2011. But coal prices turned dramatically against them. So in October, they agreed to sell their Grand Cache stakes for a buck. Each.

During the mining bull market (roughly 2002 to 2011), the industry was undergoing massive consolidation as miners rode the wave of rising metal prices. Senior mining companies like Rio Tinto and Vale SA snapped up almost everything in sight, piling up a lot of debt and unnecessary assets in the process. As long as commodity prices were high, who cared? They were just happy to get bigger.

It took a steep drop in prices — and an embarrassing wave of writedowns — to force them to reconsider their strategy. They realized too much management time was being wasted on non-core assets that deliver minimal or no return. They also recognized that low commodity prices may last for a while and that they needed to shed these assets to get as lean as possible.

It has helped that almost every major mining company replaced its CEO over the last couple of years. These guys have no emotional attachment to the assets their predecessors overpaid for, and are happy to do whatever it takes to get value out of them.

“Everyone is looking at rationalizing their portfolios to their best core assets,” said Melanie Shishler, a partner and mining specialist at Davies Ward Phillips & Vineberg LLP. “In furtherance of that, I think people are being quite unrelenting in what they’re prepared to do to reach that goal.”

And there was nothing CEOs wanted to divest more than their problem assets. These assets were unloaded for bargain-basement prices after they backfired in spectacular ways.

For Severstal, it was a combination of a deteriorating coal market and Vladimir Putin. When Severstal bought the U.S. assets in 2008, coking coal prices were soaring above US$300 a tonne. Supply was so tight that steelmakers were terrified they would not be able to source product, so they started snapping up coal mining operations.

Today, that strategy seems absurd. Benchmark prices have plunged to US$117 a tonne, due to soaring supply and uncertain Chinese demand. Steelmakers no longer see any need to be vertically integrated.

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Kinross – Poster Child For Mining Sector Errors

For Toronto-based Kinross, the central issue was also politics. The problem with the Fruta del Norte (FDN) project is that it is in Ecuador, a country with no history of large-scale gold mining. Kinross paid $1.2 billion for FDN in 2008 even though Ecuador did not have a firm mining law at the time. It was a reckless gamble, and it backfired after the government demanded outrageous windfall profits taxes. (Kinross owns equity in FDN’s new owner, so it could still benefit if the mine is built.)

Rio Tinto fell victim to a lack of good due diligence. It paid billions for the Mozambique coal assets without having a firm transportation plan in place. The transportation constraints were far bigger than anticipated, making the coal assets almost worthless in Rio’s eyes.

Handout/Kinross

Handout/KinrossKinross paid $1.2 billion for the Fruta del Norte mine in 2008 even though Ecuador did not have a firm mining law at the time. It was a reckless gamble, and it backfired after the government demanded outrageous windfall profits taxes.

 

In the two-dollar Grande Cache deal, the Asian sellers decided the assets definitely worthless to them at these prices. Experts said the sellers were facing potential cash outflows in the short term, something they clearly wanted to avoid.

Senior mining companies are still holding many unnecessary and troubled assets on their books. So it would not be a surprise to see a few more dirt-cheap deals in 2015.

One notable thing about these transactions is they usually involved a large company selling to a very small one. Sometimes it takes a small company to give a problem asset the attention it needs to create value. If they can’t get the assets turned around, then these deals are not such a great bargain.

“I’ve always said one company’s non-core asset is the cornerstone asset of another one,” said Jack A. Bass, managing partner at Jack A. Bass and Associates.

That is certainly the case with Corsa, which transformed into a serious player overnight with the Severstal deal. But now that the excitement has worn off, the company has to prove it can generate actual value out of these operations in a miserable coal market. If Corsa pulls that off and prices rebound, it could turn out to be one of the best mining deals in decades.

“We took the opportunity to come in and buy at what we think is the trough,” Mr. Dethlefsen said.

“To do that, you’ve got to have a pretty strong stomach. Over the next 12 months, it’s going to be a knife fight.”

You Have Options:

What To Do ?

Here is our recent letter:

Managed Accounts Year End Review and Forecast

November 2014 – 40 % cash position
Gold and Precious MetalsThe largest gains for our clients came from the exit from the gold producers at $18oo an ounce and continuing until we hold no gold and no gold miners . This from the author of The Gold Investors Handbook.2015 – We continue to be on the sidelines for this sector – regardless of the gnomes of Switzerland . As a safe haven gold simply wasnot there for investors despite turmoil in the Middle East, Africa and Ukraine.How much more frightening can the prospect for peace be than to have wars in multiple locations? Secondly the spectre of inflation – on which I have given numerous talks – simply failed to materialize. In fact economists and portfolio managers such as myself are now more concerned about deflation – and the spectre is a Japanese style decades long slide in the world economy.
Shipping Sector / Bulk ShippersYou can review our stock market letter athttp://www.amp2012.com to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates-  illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait.
Oil/ Energy I am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge…

Have you avoided these sectors – you would have been better off to follow our advice in 2014 and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.

You can withdraw your funds monthly if you require an income stream.

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Our client is seeking funds to expand their tanker fleet .

Interest 12 % compounded – paid 1% per month

Floating charge of the full $500,000 against the fleet – valued at  more than $ 1 M

 

Contact information:

To learn more about portfolio management ,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email

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Call Jack direct at 604-858-3202

10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

Tax website  Http://www.youroffshoremoney.com

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.

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.”

Rio Tinto

Protesters target Rio Tinto AGM
Protesters target Rio Tinto AGM (Photo credit: Eyes on Rights)

Rio Tinto (RIO : NYSE : US$55.89)
Turquoise Hill Resources* (TRQ : TSX : $7.87)

According to Bloomberg, Rio Tinto is considering a temporary halt to construction work at the Oyu Tolgoi project, the world‟s biggest copper project under construction, in Mongolia, to protest the government’s demands for a larger stake in the project and new mining royalty rates.

In October, RIO rejected a second move by Mongolia to renegotiate a 2009 investment agreement for the development of Oyu Tolgoi, which is currently the world‟s biggest copper project under construction. RIO has a 66% stake in Oyu Tolgoi through its 51% interest in Turquoise Hill. The
Government of Mongolia has a 34% stake in Oyu Tolgoi.

The project was expected to process first ore through the concentrator by year of 2012, with first concentrate production to follow in January 2013. The commencement of commercial production is expected three to five months thereafter (April and June). Completion of a feasibility study on the underground Oyu Tolgoi Phase 2 expansion is expected by June. At ~US$6 billion, Oyu Tolgoi is the largest single investment in the history of Mongolia

Imperial Metals Corp.

Imperial Metals Corp. 
III : TSX : C$13.81
BUY Target: C$22.00

COMPANY DESCRIPTION:
Imperial Metals is a Canadian-based company with interests in two mature producing copper mines in British Columbia (Mount Polley [100%]; Huckleberry [50%]). More importantly, the future and value driver of the company resides in its 100% interest in the very large but undeveloped Red Chris copper-gold project in northwest BC, which is permitted and scheduled to enter production via an open-pit in late-2014.

Investment recommendation


Imperial Metals released its Q4/12 operating results and issued 2013 production guidance that were both above our forecast (Q4/12 Cu production of 13.9 million lbs was 6% above our forecast of 13.2 million lbs; 2013 Cu production guidance of 58.5 million lbs was 11% above our
forecast of 52.6 million lbs) largely due to higher planned grades and recoveries at Mt. Polley.

We are reiterating our BUY rating and increasing our 12-month target price to C$22.00 per share (from C$21.00 per share). Our revised C$22.00 target price is based on a 25/75 weighting of 5.0x our 2013E EV/EBITDA (C$6.50 per share) and 1.0x our revised 10% NPV estimate (C$27.32 per share).

Our BUY rating is supported by the company’s 100% interest in the Red Chris Cu-Au deposit, which in our view, represents one of the only world class assets in the hands of a Canadian mid-tier producer.
Investment highlights
 We now forecast 2013E-2016E Cu production of 59m lbs, 74m lbs, and 143m lbs (previously 53m lbs, 65m lbs, and 135m lbs).

 
Valuation
Imperial is currently trading at a relatively compelling 49.4% discount to our 10% NPV estimate of C$27.32 per share versus a 16.4% discount for
the mid-tier producer peer group average.

First Quantum Minerals

First Quantum Minerals
First Quantum Minerals (Photo credit: Wikipedia)

First Quantum Minerals

(FM : TSX : $20.92)

First Quantum Minerals announced its Q4/12 production and introduced the market to its 2013 production guidance. For Q4/12, copper production increased by 26% q/q to 84,918 tonnes and gold production increased by 48% q/q to 64,383 ounces.

Higher grades from Kansanshi, increased production from Guelb Moghrein and first production from Kevitsa were the reasons for the solid quarter. On the nickel front, the company produced 10,096 tonnes from its Ravensthorpe and Kevitsa mines. The company’s new Kevitsa mine in Finland also increased FM’s platinum and palladium production to 6,123 ounces.

For 2013 the company issued operating guidance for copper in a range 302-330,000 tonnes, for gold in a range of 190,000-215,000 ounces and for nickel in a range of 40,000-45,000 tonnes. The company also announced 2013 cash cost guidance for copper of US$1.50-1.60 per pound. Along with working on increasing production, FM is also in a pitched battle for takeover Inmet Mining (IMN), whose board today advised its shareholder to reject FM hostile bid .

Freeport McMoran Update

Grasberg Mine Tailings - 2003
Grasberg Mine Tailings – 2003 (Photo credit: SkyTruth)

Oct 23

Freeport McMoran (FCX : NYSE : US$40.58)

Red metal update. 

Freeport-McMoran Copper reported Q3/12 net income of $0.86 per share, compared with net income of $1.10 per share for the same quarter last year. Consolidated sales from mines for Q3 totalled 922 million pounds of copper, 202,000 ounces of gold and 21 million pounds of molybdenum. Looking ahead, the company projects its annual copper production to increase by one billion pounds annually over the next three years through higher-grade ores at Grasberg in Indonesia and through the execution of brownfield expansions in the Americas and Africa.

The company commented that it has been in discussions with the Indonesian government to extend its contract of work agreement beyond 2021 and is considering listing a portion of PT Freeport Indonesia, its Indonesian unit, Chief Executive Richard Adkerson said on the company’s earnings call. Freeport is the world’s largest listed copper mining company and operates the world’s third-largest copper mine, Grasberg, in Indonesia. The company signed an agreement known as a contract of work, with Indonesia in 1991 for 30 years with options for two 10-year extensions. The current contract of work expires in 2021.