Iron Ore Price Drop No Relief to Shipping Sector

Price drop will not increase demand from China – and not increase shipping demand.

Iron ore declined sooner than expected this year as supplies exceeded demand and prices are unlikely to recover, according to Goldman Sachs Group Inc., which said 2014 will mark the end of a so-called iron age.

This year “is the inflection point where new production capacity finally catches up with demand growth, and profit margins begin their reversion to the historical mean,” analysts Christian Lelong and Amber Cai wrote in a report today titled: “The end of the Iron Age.” The 2016 forecast for seaborne ore was cut to $79 a metric ton from $82 and the 2017 outlook was reduced to $78 from $85, according to the New-York based bank, which stuck with a forecast for $80 next year.

The raw material tumbled into a bear market this year as the biggest producers including Rio Tinto (RIO) Group expanded low-cost output, betting higher volumes would more than offset falling prices while less competitive mines were forced to close. The decline in prices came sooner than expected, according to Goldman, which said in November that iron ore would probably drop at least 15 percent this year. The commodity is seen in a structural downtrend, JPMorgan Chase & Co. said today.

“The price decline has been dramatic, but a weak demand outlook in China and the structural nature of the surplus make a recovery unlikely,” Lelong and Cai wrote. “Lower prices for iron ore and steel are unlikely to boost demand in a material way. Instead, the day when steel production in China will peak gets ever closer.

Lowest Level

Ore with 62 percent content at the Chinese port of Qingdao fell 39 percent to $82.22 a dry ton this year, the lowest level since September 2009, according to data from Metal Bulletin Ltd. The Bloomberg Commodity Index (BCOM), which doesn’t include iron ore as a member, lost 2 percent in the period. Within the index, soybeans fell the most.

Before the surplus emerged, iron ore supplies were tight and producers had above-trend profits even as costs increased, according to Lelong and Cai. That period, dubbed by the bank as the Iron Age, is now ending, they wrote.

“The current exploitation phase in iron ore could last for a decade,” the analysts wrote. “Iron ore markets went through a 20-year period of declining prices in real terms during the previous exploitation phase that ended in 2004.”

The global surplus will more than triple to 163 million tons in 2015 from 52 million tons this year, according to Goldman. The glut was seen expanding to 245 million tons in 2016 295 million tons in 2017 and 334 million tons in 2018.

Producers’ View

The biggest suppliers see higher prices. Ore may increase as the higher-cost output exits the market, Nev Power, chief executive officer of Perth-based Fortescue (FMG) Metals Group Ltd., said in an Aug. 20 interview on Bloomberg Television. Vale SA also sees prices rebounding as supply growth slows and mines close, Jose Carlos Martins, the Rio de Janeiro-based company’s head of ferrous and strategy, said on July 31.

Iron ore may see a dramatic recovery this half, Paul Gait, an analyst at Sanford C. Bernstein, said in a report on July 9, citing factors including a seasonal increase in the second six months and an end to China’s policy tightening. Asia’s largest economy accounts for about 67 percent of seaborne demand.

Credit growth in China missed estimates in July and new-home prices fell in almost all the cities the government tracks, putting pressure on policy makers to step up stimulus as they seek to meet an economic growth target of 7.5 percent.

About 110 million tons of global supply will close next year and a further 75 million tons in 2016, Goldman estimated in the report. While the majority of closures would be in China, seaborne producers will not go unscathed, it said.

Exceed Demand’

“New seaborne iron ore supply delivered into China is expected to exceed demand growth over the next three to four years,” Daniel Kang, an analyst at JPMorgan Chase & Co. in Hong Kong, said by e-mail in response to Bloomberg questions. “In short, we see iron ore in a structural downtrend.”

Rio Tinto, the biggest supplier after Vale, plans to boost output to more than 330 million tons in 2015, according to a company estimate. Vale will raise production 8.4 percent to 348 million tons in 2015. BHP Billiton Ltd. sees an 8.9 percent increase from its Western Australian mines in the year from July 1, while Fortescue may boost shipments by 25 percent.

Fortescue’s stock declined 32 percent in Australia this year, while in London Rio shares lost 5 percent and BHP rose 0.4 percent. In Brazil, Vale dropped 23 percent.

“The shift into structural oversupply is barely six months old but seaborne prices have already declined 38 percent year-to-date,” Lelong and Cai wrote. “Rather than representing the trough for this cycle, we believe the downward pressure is set to continue.”


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.

MBAC Fertilizer Corp.

MBC : TSX : C$2.07
Target: C$3.55 

MBAC Fertilizer Corp. is a Canadian-domiciled development corporation focused on becoming a significant integrated fertilizer producer in Brazil. The company has ownership of assets within various regions of Brazil, but its immediate focus is on the development of the Itafos phosphate deposit in Goias state. Longer term, MBAC intends to produce phosphate from multiple locations across Brazil.
All amounts in C$ unless otherwise noted.

Investment recommendation
The net result of this press release to our model is favourable later in the decade as Santana ramps up to capacity in 2017E. The lowering of our capital expenditure estimate and of our operating cost assumption (albeit not to the company’s estimated levels) are net positives. However, given that our target price is based upon our 2015 EBITDA estimate and that our multiple takes into consideration the strong growth potential from additional forecast future production, our target price remains unchanged.
Investment highlights
The capital cost estimate is US$427 million (including a US$50 million contingency). There are some costs borne at the Itafos project (a US$323 million project) that would not be duplicated at the Santana project (a water dam, pre-planning/design for a doubling of output, etc), but other costs such as infrastructure to the site would be substantial (and hence why the overall cost was always expected to be higher at Santana). However, that is offset by a much higher grade and lower operating cost mine. The company expects to produce 500ktpa of SSP 0-19-0 product (which is a more valuable grade of product than what is being produced at Itafos (1-17-0) due to the much higher grade of the Santana ore body). Estimated operating cost per tonne at Santana in the BFS is US$113 versus our original estimate of US$140.
The reaction to the release was negative, not to the BFS, but to the lack of an update on Itafos, which is ramping to full operational capacity and should be at the desired level in Q4/13. We assume that the company will sell 50kt of SSP in 2013. We do highlight that every 25mt of sales only impacts our estimated cash balance by less than C$2 million. As a result, at this stage, we are more focused on the ramping up of the facility in Q4 than whether or not they meet or miss our sales estimate by 25kt in 2013, given how little an impact that is to their financial situation as estimated in our model. Further commentary on their financial position is discussed below and we believe funding is no longer a concern.
We continue to rate the shares of MBAC a BUY with a 12-month target price of C$3.55 based upon a 9.5x multiple to our 2015E EBITDA of C$80.9 million.

Aegerion Pharmaceuticals

English: Logo of the U.S. Food and Drug Admini...
English: Logo of the U.S. Food and Drug Administration (2006) (Photo credit: Wikipedia)

AEGR : NASDAQ : US$41.69
Target: US$54.00

Aegerion is a biopharmaceutical company focused on the development and commercialization of treatments for patients with severe lipid disorders. Its lead therapeutic is Juxtapid, an oral small-molecule inhibitor of MTP approved in the U.S. and currently pending regulatory review in the E.U. for treatment of patients with homozygous familial hypercholesterolemia (HoFH).


Following a top- and bottom-line beat, AEGR provided metrics on the first ~15 weeks of the Juxtapid launch and described the “accelerated” trajectory of 75 U.S. and ex-U.S. named-patients on drug (Brazil and Turkey) and scripts (>185 to date; ~9/week at week 6; ~13/week now). As a result, we continue to believe that guidance of 250-300 patients on drug by YE13 and $15M-$25M in FY13 revenue is conservative, but model for 273 and $25.5M, respectively (we assume 33 patients on drug entering April, 75 entering May [no additions] and 95 in June) until we get clarity on the trajectory post Q1. In addition, we believe a key overhang from AMGN’s AMG 145 data has been removed given the ~19% LDL reduction (vs. 40% for Juxtapid) as it is not a key competitive threat. We look to a positive CHMP decision in Q2/E.U. approval in mid-2013 as the next catalysts.
Launch details are all favorable: AEGR is seeing a higher-than-expected interest from cardiologists who have “a meaningful” number of HoFH patients, and is optimizing marketing for these practices. AEGR also indicated greater confidence on the 3K HoFH patients in the U.S. given launch experience, and will provide dropout (“very encouraging”) and compliance rates on future calls. On the payor front, AEGR has met with >100 payors and is surpassing internal pre-auth timeline metrics. The company is appealing negative payor decisions – rejections are due to paperwork or lack of payor policy. AEGR expects to give turnaround time for scripts on the Q2 call (guided to ~4-5 mo. in Jan).
E.U. approval on-track for mid-2013: AEGR likes the odds of E.U. approval (~60 days post-CHMP opinion in Q2). The company does not expect an oral explanation will be required and was pleased with the Scientific Advisory Group meeting (similar to FDA AdCom).
 Q1 financials, 2013 guidance: Q1 GAAP EPS of $(0.64) was better than consensus of $(0.71) and CGe of $(0.73) due to higher revenue ($1.2M vs. consensus of $630K) and lower GAAP R&D expense ($5.8M vs. CGe of $8.0M). AEGR exited Q1 with $140.7M and provided OpEx guidance (ex-stock-based comp) of $95M-$105M (we model for $96.2M)

Monsanto Company Target $ 121


MON : NYSE : US$104.51
Target: US$121.00

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

Investment recommendation
Monsanto remains our top large cap equity to own: From an industry viewpoint, we continue to expect a large planting in both the US this spring and in Latin America next fall, which should set up the company for a strong F2013 and a positive start to F2014. We further believe that the concern farmers have had over sourcing the best seed this year as a result of last year’s drought-plagued crop should allow for an increase in margins. We believe Monsanto will be able to capitalize on these macro events more than its peers due to its yield leading products, both current and those in the pipeline, and the benefit that we should continue to see roll out in both North and South America through our forecast period. We expect the company to improve upon its market share, and going forward, we see no equal when it relates to the level of product launches the company should be able to introduce both in the near and medium term. We also believe the company has done a good job of diffusing a potential negative RR1 soybean event in Brazil next year through its disclosure, the removal of the related forecast earnings guidance from the current fiscal year (and next), and the proactive signing of farmers to the next generation product. As a result, we believe the company’s shares will continue to outperform its peers and the market in 2013.
Investment highlights
Monsanto reported adjusted Q2/F13 EPS of US$2.73 versus our estimate of US$2.38 and consensus of US$2.57. Gross margin was reported at US$3.07 billion, above our US$2.88 billion estimate (Figure 1). Operating costs were US$958 million versus our expectation at US$988 million. The company increased its ongoing F2013 EPS guidance to US$4.40-4.50 versus US$4.30-4.40 previously, our estimate of US$4.45, and consensus of US$4.57
We continue to rate the shares of Monsanto a BUY, but have increased our 12-month target price to US$121.00 from US$113.00 previously, based upon a 23.5x multiple to our blended F2014E EPS of US$5.16.

Colossus Minerals Drill Results


 TSX : $2.88
Expanding the zone, but does anyone care?

Colossus Minerals announced further drill results from their Serra Pelada project in Brazil. The drill holes which are testing the edge of the Central Mineralized Zone (CMZ) continued to demonstrate the potential of the deposit. Hole SPD-182 demonstrated that the CMZ is tucked in closer to the nose of the folded structure, returning 3.4 metres grading 13.28 g/t gold, 0.02 g/t platinum and 0.06 g/t palladium.

Underground delineation drilling has commenced from a new drill bay that is located 45 metres lower and half the distance to the mineralized zone. Highlights from the underground include Hole SPUD-018 that intercepted 0.8 metres grading 23.07 g/t gold and 3.6 metres grading 24.37 g/t gold, 0.28 g/t platinum and 0.88 g/t palladium. Overall, the results continue to delineate and extend the CMZ mineralization, while demonstrating localized increases in widths in certain areas.

Recently, CSI updated the market on development activitie s at Serra Pelada. The company commented that it remains on track to start initial production early in the second half of 2013 at an initial rate of 250 tonnes per day tpd and continue the ramp up phase throughout the remainder of 2013 to 500 tpd. The current plan envisages two active mining faces for 250 tpd of production, three to five mining faces for 500 tpd of production and six to nine mining faces for 1,000 tpd of production.

The company expects to achieve 1,000 tpd of production by the end of the first quarter of 2014. Shares of CSI have been down sharply over the past few weeks as the market focuses on the soft gold market, poor environment for juniors and milestone risks for Serra Pelada. Also weighing on the shares is the possibility that the company could be deleted from the S&P/TSX Composite Index, in its March quarterly review. The S&P/TSX will announce their official changes after the close on Friday, March 8, with these changes coming into effective after the close on Friday, March 15.

Colossus Minerals Inc. High Grade Strike

Colossus Minerals Intersects High Grade Gold Values in Diamond Drilling at Elefante

TORONTO, ONTARIO–(Marketwire – Jan. 10, 2013) – Colossus Minerals Inc. (TSX:CSI)(OTCQX:COLUF) reports assay results from the recent diamond drilling program on the Elefante area where earlier in the year auger drilling had returned values of gold, platinum and palladium. The Elefante area is located approximately two kilometres to the southeast of the Serra Pelada Gold-Platinum-Palladium Mine. The Serra Pelada Mine is a 75%/25% joint venture between Colossus and Cooperativa de Mineracao dos Garimpeiros de Serra Pelada (COOMIGASP) located in the State of Para, Brazil.


--  Precious metal values are near surface
--  Possible new exploration target model as the samples containing precious
    metals lack the strong carbon upgrading associated with the
    mineralization at the Serra Pelada Mine
--  Mineralization is currently open in all directions as preliminary four-
    hole program tested a small proportion of surface anomalies
--  Hole EL-12-001 contained the highest overall gold value and returned
    5.70 metres grading 5.41 g/t gold, 0.04 g/t platinum and 0.29 g/t
--  Hole EL-12-002 contained the highest overall platinum and palladium
    values and returned 5.10 metres grading 0.45 g/t gold, 1.27 g/t platinum
    and 2.04 g/t palladium

Claudio Mancuso, CEO of Colossus commented, “We conducted this limited drill program to explore the possibility that mineralization encountered in previous soil and auger sampling programs continue into the bedrock. While we remain focused on development of the Central Mineralized Zone (“CMZ”) where we continue progressing well with bulk sample extraction, we are encouraged by these results and anticipate that further exploration could lead to development of a satellite deposit. The area has seen little diamond drilling by Colossus and will be further explored in 2013. We look forward to providing an update on the progression of the bulk sample and other development activities in the next few weeks.”