Gold-Mining Industry Mostly ‘Under Water,’ Gold Fields

Gold miners’ costs are mostly higher than current spot prices, increasing the likelihood of writedowns next year, according to Nick Holland, chief executive officer of Gold Fields Ltd. (GFI)

Across the industry, costs are about $1,300 an ounce including debt repayments, Holland said by phone from Johannesburg today, citing analysts’ research. Gold dropped 0.1 percent to $1,182 an ounce, bringing the decline since the beginning of 2013 to 29 percent.

“The industry by and large is under water,” Holland said. “I would expect further writedowns. Production I think will be curtailed but it will take some time to filter through the system.”

Gold producers are struggling to adapt to a lower bullion price after a decade of debt-fueled expansion, acquisitions and cost inflation during the boom years that saw bullion peak at $1,921.17 an ounce in September 2011. The spot price has tumbled in the past 18 months as investors speculate the Federal Reserve will raise interest rates due to an improving U.S. economy, lowering demand for the safe-haven metal.

Gold Fields is able to “ride this through” as it has a break-even price of about $1,050 an ounce, or $1,090 an ounce including debt repayments, Holland said. While the company calculates its reserves at $1,300 an ounce, that number includes a 15 percent profit margin, he said.

“Everything is fine for now, obviously the margin won’t be 15 percent at the current price, it will be less than that,” Holland said. “That said, the business continues to be run the same as before.”

Profit Drop

Gold Fields dropped 4.8 percent at 9:16 a.m. today in Johannesburg after the precious metal fell 1.2 percent yesterday, largely after South African trading hours. The FTSE/JSE Africa Gold Mining Index decreased 5.1 percent to 1,091.8.

Headline earnings for the South African producer with mines from Peru to Australia were $14 million in the three months to Sept. 30, compared with $18 million the previous quarter, it said in a statement today.

The Johannesburg-based company, which spun off three of its cash-generative but old South African mines to create Sibanye Gold Ltd. last year, is seeking to “aggressively” pay down debt over the next three years as it adjusts to the lower gold price, Holland said. The company is also on the lookout for cheap, in-production acquisitions that more troubled miners are offloading.

Gold Fields reduced net debt in the quarter by $137 million to $1.5 billion. All-in sustaining costs for the year are expected to be 3 percent lower than previous forecast at $1,090 an ounce, it said.

Gold production rose 2 percent to 559,000 ounces in the quarter compared with the previous three months, the company said.

HudBay Minerals

HBM : TSX : C$10.87

Target: C$13.50
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
GROWTH TO 2019; 
We have incorporated the Augusta Resources/Rosemont copper project
into our HBM full valuation model, and incorporated our new
commodity price forecasts throughout the model.
Action and valuation
We are maintaining our BUY recommendation and raising our 12-
month target price to C$13.50 (from C$11.00). Our C$13.50 target price
is based on the average of: i) 7x 2015E EV/EBITDA, which would imply
a share price of C$12.81, and ii) our NPV10 estimate of C$14.12.
We see the potential for upside to our target price as Constancia and
Rosemont progress. 6x 2016E EBITDA (with Constancia in production)
equates to a share price of C$14.89, and 5x 2019E EBITDA (with
Rosemont in production) equates to a share price of C$30.51.
Our NPV10 estimate of C$14.12 includes C$7.50 for Constancia and
C$4.89 for Rosemont (treating AZC acquisition costs as sunk costs).
We are forecasting low-point cash balances of C$213 million mid-2015
during Constancia start-up, and then C$166 million mid-2018 during
Rosemont start-up.
Next potential catalysts and investment risks
We believe Constancia commissioning and Rosemont permitting are key
catalysts and key valuation risks for HBM over the next 12 months

Thompson Creek Metals Company Inc. SELL

TCM : TSX : C$3.28

Target: C$2.70

Thompson Creek Metals is one of the largest
molybdenum producers in the world. The company owns
the Thompson Creek open-pit mine and mill in Idaho; a
75% share of the Endako open-pit mine, mill, and
roasting facility in northern BC; and a metallurgical
roasting facility in Langeloth, Pennsylvania. Thompson
Creek Metals is also developing the Mount Milligan Cu-Au
deposit near Prince George in B.C.

All amounts in C$ unless otherwise noted

Metals and Mining — Base Metals and Minerals
With TCM having now established a reporting format for Mount
Milligan, we have rebuilt our valuation model, and with TCM confirming
that in light of current molybdenum price strength it is reviewing the
decision to close the TC Mine at end-2014, we have returned the TC
Mine to our valuation model, with Phase 8 production from Q1/16E.
Our new 2014-16E adjusted (for Royal Gold stream payments) EBITDA
forecasts are US$184 million, US$222 million and US$270 million, from
previous US$197 million, US$217 million and US$218 million.
Action and valuation
We are maintaining our SELL recommendation but increasing our 12-
month target price to C$2.70 (from C$2.20). Our C$2.70 target is based
on the average of: i) 6x our 2015E EV/EBITDA, which would imply a
share price of C$2.89, and ii) our NPV8 estimate of C$2.48. We are
forecasting an end-2014 cash balance of US$213 million, providing
leeway for investment in additional Mount Milligan crushing capacity if
Next potential catalyst and investment risks
Given current net debt of US$799 million against a market cap of C$562
million, TCM’s equity valuation is extremely sensitive to assumed model
inputs. To demonstrate: i) were we to increase our molybdenum price
assumptions from US$11/lb to US$13/lb, our NPV8 would increase to
C$3.58, ii) however, were we to remove the TC mine re-start from our
model should moly prices fall again, our NPV8 would fall to C$1.19, and
iii) should we increase our steady state Mount Milligan cost forecast
from US$280Mpa (~US$10/t site costs) to US$300Mpa, our NPV8 would
fall to C$1.41

Barrick Gold SELL

ABX : TSX : C$19.82
Target: C$17.50

Barrick is the largest gold producer in the world and has
a portfolio of operating mines and development projects
located in the United States, Canada, Australia, Peru,
Chile, Argentina, and Tanzania. In 2012, the company’s
operating mines produced 7.42 million ounces of gold, at
total cash costs of $584 per ounce.
All amounts in C$ unless otherwise noted.

Metals and Mining — Precious Metals and Minerals
Investment recommendation
Our target price has been revised from C$20.50 to C$17.50 to reflect the
recent shift lower in the gold forward curve and to reflect our estimate
of potential reserve and mine plan changes at YE13. This report
provides an analysis of potential YE13 reserve changes on an asset by
asset basis. Based on the implied negative return to target, we have
revised our rating on Barrick from Hold to SELL.
Investment highlights
 Barrick is developing new mine plans to reflect a lower gold price
environment and maximize cash flow. We estimate 2013 gold
production at 6.36mozs, 11% lower sequentially. Cash operating
costs are expected to be only modestly lower at ~$585/oz.
 We estimate that operating reserves (excluding development assets)
will have declined ~18% at year-end. While reserve grades could
potentially increase ~11%, we note that Barrick has been mining
~19% above reserve grade over the past four years.
 Our 2013 EPS and CFPS estimates have been revised to $2.30 (from
$2.32) and $3.23 (from $3.07), respectively.
We have revised our target price from C$20.50 to C$17.50, which is
predicated on an above sector average 0.90x multiple to our forward
curve derived operating NAVPS estimate of C$22.34 (from C$25.65) plus
net debt and other assets. Our target multiple fully reflects Barrick’s
numerous positive attributes; we just do not see the value proposition
for Barrick at current metals prices. Barrick is currently trading at a
27% premium to its gold peers on NAV. Near term positive free cash
flow is expected to be largely utilized to finish constructing Pascua.


HudBay Minerals Update

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

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
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.
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.

Silver Wheaton Corporation Update Target $30

SLW : TSX : C$21.59
Target: C$30.00

Silver Wheaton is uniquely positioned as the purest silver
producer. The company’s asset base consists of silver
purchase agreements with the San Dimas and
Penasquito mines in Mexico, Pascua-Lama project in
Chile/Argentina, Zinkgruvan mine in Sweden, Yauliyacu
mine in Peru, Stratoni mine in Greece. Most recent
streaming deals with Hudbay minerals (silver and gold
streams at 777 and Constancia) and Vale (gold streams
at Salobo and Sudbury mines).
All amounts in C$ unless otherwise noted

Metals and Mining — Precious Metals and Minerals

Investment recommendation

We maintain our BUY rating on Silver Wheaton. We believe the
perceived increased risk with respect to Pascua construction and
Rosemont permitting has been largely discounted in the company’s
shares. SLW boasts a robust growth profile and continues to generate
strong free cash flow at spot gold and silver prices.
Investment highlights
 We updated our model to reinstate the stream from Mercator’s
Mineral Park mine in Arizona following the proposed merger with
Intergeo MMC, which is expected to inject cash to sustain
operations. Based on Mercator’s previous mine plan, not assuming
any changes are made following the merger, we value the Mineral
Park stream at US$108 million or 1.4% of NAV.
 We also updated our model to incorporate the new PEA for Alexco’s
Keno Hill project in the Yukon. Production re-start is now expected
approximately one year later in Q1/15. Our valuation for Keno Hill
has declined from US$116 million to US$50 million. Given the
significant financing risk surrounding the re-start, we continue to
discount the stream by 50%. Alexco is in violation of the completion
agreement based on achieving throughput of 400tpd by YE14. We
assume SLW will extend the deadline given the option value.
 Overall, our 2014 production forecast of 39.4mozs remains largely
unchanged. Our 2013 EPS and CFPS estimates remain materially
unchanged at $1.06 and $1.50, respectively.
We are maintaining our target price of C$30.00, which is predicated on
a 1.30x multiple to our forward curve derived operating NAV estimate of
C$25.29 (previously C$25.44) plus net debt and other assets.

Tahoe Resources Inc.

THO : TSX : C$19.93
Target: C$27.00
Tahoe Resources’ key asset is its 100% owned flagship Escobal mine in Guatemala. Escobal is one of the world’s highest grade and largest primary silver deposits. Silver production is expected to ramp quickly and exceed 20mozs per annum for a period of at least 10 years with a stated goal of 20 years. Cash operating costs are forecast to be near or below $5.00/oz of silver net of gold, zinc and lead by-product credits.

Metals and Mining — Precious Metals and Minerals
Investment recommendation
We reiterate our BUY rating on Tahoe Resources following the release of Q3/13 results. We believe the key driver of Tahoe’s share price over the next six months will be the successful ramp up of Escobal to full production and we see no major impediments. THO is currently trading at 0.75x NAV, a 3% discount to its large cap peers. We believe THO should trade at a strong premium given the forecast industry leading margins, strong governance and alignment, and overall asset quality.
Investment highlights
 The ramp-up to commercial production is proceeding well with all major mill components fully commissioned. The key remaining priorities are improving concentrate specs and tailings filtration; fixes have been implemented and appear to be working. The mill operated near 50% of capacity in the first 10 days of November vs. 30% in October. We estimate commercial production in mid-Q1/14.
 Guidance for 2014 calls for 18-21mozs silver in concentrate (including pre-commercial production) versus our previous estimate of 15mozs. Cash costs are estimated to be $5.65-6.25/oz versus our previous estimate of $4.02/oz (using the same by-prod prices). The current cash balance of $39 million appears adequate. Our 2014 EPS estimate remains unchanged at $1.00.
 Management confirmed the potential for an inaugural dividend; potentially by the AGM in May 2013. We believe an initial dividend of $0.50/share (implying a 2.5% yield) may be achievable in the context of current silver prices. The current short position on THO is 22.5 million shares.
Our C$27.00/share target is predicated on a 0.95x multiple to our forward curve derived operating 5% NAVPS estimate of C$26.32 plus net debt and other assets.

Rio Tinto plc Expansion Plans

RIO: 3140p
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.
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.
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.

Fission Uranium Spec Play

Metals and Mining — Exploration and Development
Investment recommendation
The recent vote on the plan of arrangement by Alpha Minerals (AMW : TSX-V | HOLD) in favour of its acquisition by Fission Uranium in a predominantly share transaction (5.725:1, AMW:FCU) and the proposed spincos (Alpha Exploration Inc. and Fission 3.0 Corp) paves the way for the merged Fission Uranium Corp. to provide investors with a 100% exposure to the Patterson Lake South uranium project in the SW Athabasca Basin, which in our view is currently the most attractive exploration play in the uranium sector.  SPECULATIVE BUY
Investment highlights
 We estimate that the merged company will have a F/D share count
of 355.2 million shares with 338.6 million in I/O as Alpha Mineral’s
options and warrants are exercised. The forecast W/C position takes
into account the equity financing closed in late October for gross
proceeds of C$12.9M, cash inflows from ITM opt/warrants from
both companies and cash outflows related to generating the spincos
(C$3M each) and transaction costs. If the FCU option/warrants are
exercised its W/C position would be C$45M or C$35M, without the
early exercise. Its W/C position would be sufficient to fund (C$20-
24M) a winter and fall 2014 drill program leading to a maiden
resource estimate by Q3/14E. We will model the impacts on the
company after the transaction is closed ( we estimate Dec. 6).
 The spinco (Fission 3.0 Corp) will have C$3M in W/C and a portfolio
of assets which includes the Patterson Lake North project (27,408
ha), a JV with Azincourt Uranium Inc. (AAZ : TSX-V | Not rated),
North Shore property (55,160 ha, 100%-owned) and the Clearwater
West property (11,835 ha) where Brades Resource Corp (BRA : TSXV
| Not Rated) is earning in to a 50% stake.

VALE Update : Target Price Now $17.50

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

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 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.
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.
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.


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