Coll’s colleague Peter Campbell’s two picks in the Base Metals sector are Globestar Mining (GMI: TSX) and Consolidated Thompson Iron Mines (CLM: TSX).
Globestar Mining (GMI: TSX)
Globestar’s primary asset is the Cerro De Maimón open pit mine in the Dominican Republic, which was commissioned in September 2008. “The mill processes sulphide and oxide ore at 2,000 tpd. Start-up of the 1,300 tpd sulphide plant has gone smoothly and concentrate is being produced. An initial 2,000 tonnes of concentrate was shipped on November 5 and another 2,000 tonnes on November 12, 2008.” Globestar currently delivers weekly shipements of approximately 1,000 tonnes and Campbell expects the company to declare commercial production in January 2009. The company has also completed construction of a 700 tpd oxide plant which is currently being commissioned. Campbell expects an announcement regarding the pouring of gold and silver bars shortly.
Campbell expects the US%69 million Cerro De Maimón mine to produce “25 million lbs of payable copper, 19,000 oz of Gold and 450,000 oz of Silver per year for each of the first three years, and approximately 25 million lbs of copper, 7,000 oz of Gold and 400,000 oz of Silver per year for an additional six years.” Based on the already mentioned Jennings Capital base metal forecasts for 2009, Campbell estimated 2009 EPS of US$0.08 and 2009 OCFPS of US$0.21. That would mean that shares of GlobeStar currently trade at a low 6x 2009 EPS and 2x 2009 OCFPS! Campbell’s target price for Globestar Mining is $1.70/sh.
2009 Iron Ore Pricing
The iron ore price is negotiated annually between Compania Vale do Rio Doce (NYSE-RIO) and a large Chinese steel producer, usually Baosteel. Iron ore is priced on a benchmark system and the “negotiated reference price is for the supply of iron ore fines f.o.b. Brazil.” Other suppliers of iron ore usually follow this benchmark price with minor adjustments. “A similar process is also in effect for other iron ore products such as lump ore and pellets. However, lump ore and pellets normally trade at a more-or-less fixed premium to the price agreed to for fines.”
The reference price for iron ore has steadily increased over the last five years and last year, Australian producers separately negotiated an 85% increase, a departure from historical norms. “Current (i.e. 2008) pricing for iron ore fines f.o.b. Brazil is US$1.344 per DMTU (Dry Metric Tonne Unit). By way of example, emerging Canadian iron ore producer, Consolidated Thompson Iron Mines Limited’s concentrate grading 66.5% iron would sell on this basis for US$89.38 per dry tonne. In years previous to this recent upswing in prices, annual benchmark price changes averaged ±5%. However, the period of rapidly increasing benchmark prices may be over.”
Campbell believes the slowing global economy and worldwide declines in steel demand and output have darkened the outlook for iron ore prices. Campbell’s forecast for iron ore prices is shown in the figure below.
Consolidated Thompson Iron Mines (CLM: TSX)
Consolidated Thompson Iron Mines Limited is developing the Bloom Lake iron ore mine located near Labrador City, Quebec. The project, consisting of an open-pit mine and concentrator, is on schedule to commence production by the end of September 2009. The concentrator is expected to produce 8 million tpa of iron ore concentrate grading 66.5% iron. The company has signed an off-take for all of its concentrate with Chinese company Worldlink Resources Ltd., a subsidiary of Worldlink International (Holding) Ltd.
The company has also singed a rail haulage contract with Quebec North Shore & Labrador Railway which covers haulage for the Company's concentrate production from Wabush Junction (near Labrador City) to Sept-Îles Junction, approximately 400 km away. The only shortcoming is a 31 km rail line that is required from Bloom Lake to Labrador City to connect to the QNS&L railway. However, Consolidated Thompson does have an arrangement with a third party to build and operate the connector line. Environmental approval to build the line has been received, and the Company has advanced C$51 million to the third party for capital to build the rail link.
While the company does have enough funds to sustain construction till Q2/09, it will require additional debt financing to complete the project. In late October 2008, Consolidated Thompson announced that it had received term sheets for debt facilities in an aggregate principal amount in excess of US$250 million which according the the press release, the company expected to be finalized shortly. Meanwhile Campbell is of the opinion that the “Company needs less than $200 million to complete the project.”
Campbell models an average EPS of $0.90 and a CFPS of $1.16 per fully financed, fully diluted share discounted to 2009 at 12%, for the first four full years (i.e. 2010 to 2013), of production. That would mean that Consolidated Thompson currently trades at 1.0x EPS and 0.8x CFPS.
In Campbell’s model, he assumes a 20% decrease in the benchmark price of iron ore for 2009, and incorporates a further 5% decrease in the benchmark for the subsequent three years. His long term benchmark price is US$0.922/DMTU. Campbell’s target price for Consolidated Thompson is $5.00/sh.
oil and gas picks to follow ...
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