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1、Top picks,Buy,Hold,Buy,Buy,Buy,Buy,Deutsche BankMarkets Research,Global Emerging MarketsBrazilMetals&Mining,PeriodicalWhats next,Date8 October 2012Rodrigo Barros,Latam M&M WeeklyWill iron ore prices rally?We are cautious.Platts IODEX 62%Fe increased by USD5.5/dmt today and it now stands atUSD112.5/d
2、mt cfr China.We continue to speak with mining companiesregarding the outlook for iron ore and in their view the iron ore price is likely tobe range-bound between USD110-120/dmt cfr China.In our recent trip to Asiawe also learned that the recent rally in iron ore prices had been driven byfinancial in
3、stitutions and traders,rather than purchases by steelmakers.Therefore we see limited upside for iron ore prices from here.Steel sector profitability in China likely to improveWe continue to believe that Chinese steel sector will be under pressure formany years,as capacity additions should continue t
4、o grow at a faster pacethan demand.However,we believe that prices may improve in the next coupleof months,for two reasons:(i)October and November are seasonally strongmonths for steel consumption in China and(ii)the current level of financiallosses in the sector cannot be sustained for long.,Researc
5、h Analyst(+55)11 2113-Leandro CappaResearch Analyst(+55)11 2113-Gerdau(GGB.N),USD9.40Companies FeaturedVale(VALE.N),USD18.21Gerdau(GGB.N),USD9.40Ternium(TX.N),USD19.03CSN(SID.N),USD5.51Usiminas(USIM5.SA),BRL10.30,Whats next?We expect the main topics for this week to be:(i)how much further can ironor
6、e prices go(not much,in our opinion),(ii)whether steel prices in China willgo up(we think so,for the next couple of months)and(iii)whether other typesof iron ore price discounts may arise,such as a discount for pellet feed inrelation to sinter feed.Crystal ballWe estimate January 2013 EBITDA/t for C
7、hinese HRC at USD35(-USD13 vs.previous week)and for European HRC at USD5(-USD3 vs.previous week).Assuming current prices remain stable,May 2013 EBITDA/t would be,respectively,USD35 and USD10.Weekly recapThe main highlights from last week were:(i)IODEX closed on Friday atUSD107.0/dmt,USD0.5/dmt highe
8、r vs.previous weeks close,(ii)Vale totemporarily idle pellet plants,and(iii)Southern Copper expects slightly loweroutput from Peru in 2013.Valuation and risksWe value LatAm Metals&Mining stocks using DCF as a primary methodology.For WACC calculation,we assume a 5%market risk premium and a 4%risk-fre
9、e rate.For the steelmakers,we incorporate a multiple component tocalculate the target prices in addition to the DCF.Key risks include currency,project delays,overpaying for acquisitions,and slower-than-expected globaleconomic growth.More on valuation and risks on page 18._Deutsche Bank Securities In
10、c.All prices are those current at the end of the previous trading session unless otherwise indicated.Prices are sourcedfrom local exchanges via Reuters,Bloomberg and other vendors.Data is sourced from Deutsche Bank and subjectcompanies.Deutsche Bank does and seeks to do business with companies cover
11、ed in its research reports.Thus,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.DISCLOSURES ANDANALYST CERTIFICATIONS ARE LOCATED
12、 IN APPENDIX 1.MICA(P)072/04/2012.,8 October 2012Metals&MiningWhats nextWhats next?Pessimism towards the steel sector also in JapanWill iron ore prices rally?We are cautious.Platts IODEX 62%Fe increased by USD5.5/dmt today and it now stands atUSD112.5/dmt cfr China.We continue to speak with mining c
13、ompanies regarding theoutlook for iron ore and in their view iron ore price is likely to be range-bound betweenUSD110-120/dmt cfr China.In our recent trip to Asia we also learned that the recentrally of iron ore prices had been driven by financial institutions and traders,rather thanpurchases by ste
14、elmakers.Therefore we see limited upside for iron ore prices fromhere.Steel sector in China likely to improveWe continue to believe that Chinese steel sector will be under pressure for many years,as capacity additions should continue to grow at a faster pace than demand.However,we believe that price
15、s may improve in the next couple of months for two reasons:(i)October and November are seasonally strong months for steel consumption in Chinaand(ii)the current level of financial losses in the sector cannot be sustained for long.Will the pellet feed discount return?We met trading houses and steelma
16、kers in Japan last week and a common requestfrom some of them is the return of the pellet feed discount vs.sinter feed.According tothem,pellet feed supply is expected to increase more than demand in the years aheadand this may trigger the resumption of the discount that existed in the past.,Page2,De
17、utsche Bank Securities Inc.,8 October 2012Metals Copper stays flat,In this report,we incorporate DBs most recent commodities price assumptions into ourmodels.In the case of Vale,we now assume that iron ore prices will averageUSD124/dmt in 2012(-11%)and USD116/dmt in 2013(-8%).On Copper,as pricesrema
18、ined relatively resilient over the past quarters,assumptions changed little,toUSD3.62/lb in 2012(+2%)and remained flat at USD3.63/lb in 2013.For SCCO andGrupo Mexico,we adopted new LT growth assumptions and brought to our model thedecision by the Delaware court on the litigation related to the sale
19、of Minera Mexico.Our ratings remain unchanged at this time.Vale:lower earnings estimates for 2012 and 2013Our new commodity price assumptions led us to revise Vales EPADR estimates toUSD2.09 for 2012(-22%vs.prior)and USD2.09 for 2013(-30%).EBITDA forecastsdecreased to USD17.4bn for 2012(-19%)and USD
20、19.5bn for 2013(-24%).Our new TPis USD24(from USD26).We expect a minimum of USD3.4bn in dividends next year sothat its controlling shareholder,Valepar,is able to pay the principal and interestassociated with redeemable shares issued in 2008 as we explained in a report datedSeptember 17th:“Vale:Minim
21、um dividend of USD3.4bn in 2013;Heres why”.Please seeour 3Q12 earnings preview in the body of this report.SCCO vs Grupo Mexico:Delaware Supreme Court ruling may favour SCCOThe Delaware Supreme Court has settled USD2.0bn in compensation that GrupoMexico would pay in relation to SCCOs acquisition of M
22、inera Mexico in 2005.SouthernCopper allegedly paid an excessive price for Grupo Mexicos 99%interest in MineraMexico.As we understand this case is close to an end,we made changes to bothmodels conservatively considering the payment of the full amount.We estimate SCCOnet debt will be reduced by USD1.1
23、bn while Grupo Mexico will increase by USD0.4bnas a result of these changes.Also,we took the Tia Maria project out of our modelswhile we wait for further developments on environmental licensing for the mine.Ournew TPs are USD42 for SCCO(from USD36)and MXN52 for Grupo Mexico(fromMXN47).Please see our
24、 3Q12 earnings preview on the next page of this report.Figure 1:Commodities price revision summary,Please see full reportpublished on October 2nd,2012,Current,Previous,Change,2012E,2013E,2014E,2012E,2013E,2014E,2012E,2013E,2014E,Iron ore(USD/t)Copper(USD/lb)Nickel(USD/lb)Molybdenum(USD/lb)Silver(USD
25、/oz)Hard coking coal(USD/t),123.83.628.013.632.0210,116.33.638.514.044.0183,120.03.409.116.040.0200,139.23.588.313.933.3228,140.03.638.814.042.7264,130.03.409.116.036.0230,-11%1%-3%-2%-4%-8%,-17%0%-4%0%3%-31%,-8%0%0%0%11%-13%,Source:Deutsche Bank,Deutsche Bank Securities Inc.,Page3,2012,8 October 20
26、12Metals&MiningWhats nextVale Alert-Will pellet feeddiscount come back?Japanese companies asking for a pellet feed discount,We met trading houses and steelmakers in Japan early this week and a commonrequest from some of them is the return of the pellet feed discount vs.sinter feed.According to them,
27、pellet feed supply is expected to increase more than demand in theyears ahead and this may trigger the resumption of the discount that existed in the past.Vale expected to offer more pellet feed in ChinaVale is expected to increase its sales of pellet feed to China next month as aconsequence of the
28、announced shutdown of some of its pellet plants.Depending onmarket conditions,expected additional pellet feed supply to China will be 5mtpy to 10mtpy.Vale seems to be aiming at a higher market share in ChinaIn our opinion Vale is seeking to increase its market share in China in order to offsetweak d
29、emand in other markets,such as Europe and Japan.Signals of this strategy arethe higher sales in the spot market(estimated at two capsize ships per day)and thediscount that currently apply to high silica ore.Update on Vales strategyWe believe that Vales strategy is focused on displacing marginal supp
30、ly from expensiveiron ore mines in China and promoting a discount strategy that improves its relativeposition compared to other players.A potential discount on pellet feed would have amarginal impact on the companys results,but could impact the valuation of new pelletfeed projects yet to be develope
31、d thus curbing future additional supply.We are cautious on Vales short term iron ore pricesWe believe that Vales realized iron ore prices in the 3Q12 may disappoint investors asthe company adopted a strategy of maximizing volumes that implied more sales in thespot market.Such type of sales usually c
32、ommand lower prices since Vale is not able tofully obtain a premium for its higher quality iron ore.We are cautious on Vales 3Q12results.Our Buy rating on the stock is based on the expected expansion of its iron orevolumes,expected to occur from 2H13 onwards.Page4,Alert published on October 5th,Deut
33、sche Bank Securities Inc.,8 October 2012Metals&MiningWhats nextImport parity calculationRebar and heavy plate premium at 14%,Figure 2:Hot rolled sheet domestic premium0,Figure 3:Cold rolled sheet domestic premium0,-10%,-5%discount,5%premium,10%,-10%,-5%discount,5%premium,10%,Source:Deutsche BankFigu
34、re 4:Rebar domestic premium0,Source:Deutsche BankFigure 5:Heavy plate domestic premium0,-10%,-5%discount,5%premium,10%,-10%,-5%discount,5%premium,10%,Source:Deutsche BankDeutsche Bank Securities Inc.,Source:Deutsche Bank,Page5,8 October 2012Metals&MiningWhats nextCrystal ballM&M leading indicatorsSw
35、ap curve analysisRebar future pricing for January 2012 stands at USD563/t(-USD1 vs.previous week)and for May 2013,at USD569/t(-USD1 vs.previous week).Iron ore futures(SingaporeExchange)for the same dates stand,respectively,at USD114/dmt(+USD5 vs.previousweek),and USD113/dmt(+USD5 vs.previous week).P
36、rofitability outlookWe estimate January 2013 EBITDA/t for Chinese HRC at USD35(-USD13 vs.previousweek)and for European HRC at USD5(-USD3 vs.previous week).Assuming current,prices,remain,stable,May,2013,EBITDA/t,would,be,respectively,USD35 and USD10.Scrap vs.iron ore/cokeThe current ratio of scrap to
37、 iron ore/coke stands at 1.36(-3.1%vs.September),whilethe ten-year average is 1.26.According to our calculation,scrap is more expensive thaniron ore and coal at this time.Historical spreadsMetal spreads in the US suggest that the current spreads are below the long-runaverage.Price above raw material
38、 in Europe is higher than the long-run average andprice above raw material in China is also higher than the long-run average.Vale ports lineupThe current lineup of Vales ships suggests iron ore exports of 20.6mt in October2012(excluding Samarco).At the same time last month,export forecasts forSeptem
39、ber were 23.5mt.,Page6,Deutsche Bank Securities Inc.,Jan-13,May-13,Dec-12,Nov-12,Mar-13,Jun-13,Feb-13,Apr-13,Jul-13,(USD/t),(USD/t),Jan-13,Apr-13,May-13,Mar-13,Dec-12,Nov-12,Jun-13,Feb-13,Jul-13,Jul-13,(USD/t),(USD/t),Jan-13,May-13,Apr-13,Nov-12,Mar-13,Dec-12,Jun-13,Feb-13,Jul-13,Jan-13,Apr-13,May-1
40、3,Nov-12,Dec-12,Mar-13,Feb-13,Jun-13,(USD/t),Oct-10,Oct-11,Oct-12,Apr-10,Apr-11,Jun-10,Aug-10,Dec-10,Jun-11,Aug-11,Dec-11,Apr-12,Jun-12,Aug-12,Feb-11,Feb-12,(USD/t),12/16/10,01/15/11,02/14/11,03/16/11,04/15/11,05/15/11,06/14/11,07/14/11,08/13/11,09/12/11,10/12/11,11/11/11,12/11/11,01/10/12,02/09/12,
41、03/10/12,04/09/12,05/09/12,06/08/12,07/08/12,08/07/12,09/06/12,10/06/12,8 October 2012Metals&MiningWhats nextM&M dashboardFigure 6:Crystal ball,Exihibit 1:Rebar futures600590580570560550540530520510500,Exihibit 2:Iron ore forwards120115110105100959085,8/4/2012,9/4/2012,10/5/2012,8/4/2012,9/4/2012,10
42、/5/2012,Source:Bloomberg Finance LP and Deutsche BankExihibit 3:Chinese profitability560550540530520510500490,Source:Bloomberg Finance LP and Singapure Exchange LtdExihibit 4:European profitability660650640630620610600,Chinese HRC cost,Current HRC price,European HRC cost,Current HRC price,Source:Pla
43、tts,MetalBulletin,Bloomberg Finance LP and Deutsche BankExhibit 5:Scrap vs.iron ore&coke1.9,Source:Platts,MetalBulletin,Bloomberg Finance LP and Deutsche BankExhibit 6:Historical spreads,1.71.51.31.10.9,Spr e a ds(USD/t)Slab-PigMetal Spread(Flat,USA)Blast Furnace Spread HRC,ChinaBlast Furnace Spread
44、,EuropePig-Scrap ShreddedHRC-Slab,GermanyCRC-HRC,GermanyHRC US-Germany,Cur r e nt1053292673935315610116,10y av1213452283417612810120,7y av130370228361911481032,5y av12136422334710615395-16,Scrap/(Iron Ore+Coal)Source:Platts,SBB and Deutsche BankExhibit 7:Ports lineup,10y average,Source:Platts,MetalB
45、ulletin and Deutsche BankExhibit 8:Pellet premium,(0 0 0 t)Ponta da MadeiraTubaraoItaguai,Oct-1 27,1558,4201,490,Nov-1 21,5952,8750,Tota l8,75011,2951,490,6560555045,Guaiba 3,533Tota l 2 0,5 9 8Source:Vale and Deutsche Bank,2404,7 1 0,3,7732 5,3 0 8,40353025,20Pellet PremiumSource:MySteel,SteelHome
46、and Deutsche Bank,Deutsche Bank Securities Inc.,Page7,8 October 2012Metals&MiningWhats nextWeekly recapVale to temporarily idle pellet plantsPlatts iron ore prices ended Friday at USD107.0/dmt cfr China,USD0.5/dmt higherthan in the previous week,reflecting a stable iron ore market sentiment.However,
47、market participants were bullish about stronger demand in the current week due toChinese mills restocking after the week-long National Day holidays.Vale to temporarily idle pellet plants:Vale announced on October 4th that it will idlein November the Sao Luis and Tubarao I&II pellet plants,which comb
48、inedproduced 5mt in the first half of 2012.This decision is likely to imply an addition of10mtpy to Chinas iron ore spot market,causing further displacement of supplyfrom Chinese domestic iron ore producers.For more details please read our full alert“Adjusting strategy for the USD110/t iron ore worl
49、d”published on October 2nd.Southern Copper expects slightly lower output from Peru in 2013:According toReuters,Southern Copper expects slightly lower output from Peru in 2013 at 330ktons(-3%vs.2012 projected output)on lower output from its Toquepala coppermine due to lower grades.Company expects to
50、produce 654k tons in 2013.Separately,the company is to decide in January if it will go ahead with itsUSD1.2bn Los Chancas project in Peru.Brazil auto production September 2012:Anfavea reported that Brazilian autoproduction decreased 14%MoM in September,to 282,500 units.After record highsales in Augu
