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26 October 2011
LatAm Metals & Mining
Mixed 3Q Expected; Good for Miners, Tough for Steel; Focus to Be on Management Commentary
The 3Q earnings season coincides with a period of deep global uncertainties – US growth slowdown, the European debt crisis and a potential slowdown in China (at least in the short term). Thus, we believe that any earnings beat may not be rewarded as handsomely as it might be in a more stable macro environment as all eyes are likely to be on forward-looking management comments and indicators. Overall, steel should see another challenging quarter while miners should see another quarter of strong profitability, especially the iron ore miners, which saw little price deterioration until very recently. However, the mood will be anticipatory and watchful, in our view. Early feedback from our China trip warrants a cautious stance in the near term. Steel demand in China seems to be deteriorating, driven mainly by credit tightness and marginal steel producers starting to make (small) losses. Iron ore spot prices have fallen sharply to $131.7/t over the past two weeks, and with 4Q contract prices at ~$175/t, miners have started to offer clients in China the option to move to spot (with the condition that contract volumes will be honored and that it cannot be reversed). This is a sign that demand slowdown is being felt, and warrants near-term caution on the sector until we see more clarity on the current rout in both iron ore and Chinese steel prices (prices at ~$650/t vs. low $700s earlier in the week). Regarding Brazilian steelmakers, while declining raw materials may provide some kind of breather; we believe softer international steel prices are likely to balance that out through downside risks to domestic prices and/or higher imports. In any case, given Brazilian steelmakers maintain ~3-4 months of raw material supply, the full impact of the lower costs should be felt only by 2Q12. 3Q for miners: Focus to be on management comments, insights and actions. The 3Q earnings season is unlikely to be a significant driver for the sector (barring a major miss/beat), in our view, as investors are likely to be more concerned about the outlook for the coming quarters. Overall, we expect a good quarter for miners – Vale should see record EBITDA, while SCCO/GMex should see a relatively stable to a marginally improved quarter. However, the focus is likely to be on the recent developments in China as well as on the severity with which managements see the threat of a potential slowdown. Developed market growth also remains a concern but should take a back seat compared to China, in our view. Shares have derated significantly, and investors are already pricing in at least some impact of a slowdown in China, in our view, and any comforting messages or actions are likely to prove positive for the mining stocks. Overall, we expect the managements to reiterate confidence in the medium- to long-term outlook for commodity demand, while cautioning about the near-term volatility. For company-specific expectations, please see Table 3.
Latin American Metals & Mining Rodolfo R. De Angele, CFA
(55-11) 4950-3888 email@example.com Banco J.P. Morgan S.A.
Mandeep Singh Manihani, CFA
(1-212) 622-6433 firstname.lastname@example.org J.P. Morgan Securities LLC
(55-11) 4950-3983 email@example.com Banco J.P. Morgan S.A.
Table 1: LatAm Comps
Company Vale GMEX SCCO MMX Ternium Gerdau CSN Usiminas Magnesita Mining Copper Steel EV/EBITDA 11E 12E 3.4 3.1 5.4 4.4 6.1 5.1 9.3 8.4 3.5 3.6 6.4 5.7 4.9 5.0 12.9 8.8 7.0 6.3 4.5 4.0 3.8 3.6 6.7 5.8 P/E 11E 4.4 9.5 9.6 11.8 7.5 12.5 5.8 34.4 17.3 6.4 7.1 13.6 12E 4.4 7.8 7.8 17.2 7.4 12.4 6.2 22.7 14.0 6.0 6.5 11.6
Source: J.P. Morgan estimates.
Table 2: JPMe – 3Q11 EBITDA
Company Vale MMX GMEX SCCO CSN GGB USIM MAGG TX Unit US$M R$M US$M US$M R$M R$M R$M R$M US$M JPMe 11,264 133 1,544 1,153 1,651 1,217 352 84 317 vs. Cons 10% 7% 6% 5% 1% -3% -4% -5% -6%
Source: J.P. Morgan estimates, Bloomberg.
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Reiterate preference for mining over steel. please see Table 4.com Latin America Equity Research 26 October 2011 3Q for steel: Focus to be on the degree of margin deterioration and industry pricing power. driven by peak cost pressures and still-weak prices and soft volumes. De Angele. especially for flat steel. Our top picks in the sector are Vale (OW) and SCCO (OW). volumes are likely to be under pressure driven by continued imports. should continue to trade in mini-cycles until we see a better supply-demand balance. mainly fallout from the Chinese government’s monetary tightening policy. The operating environment for the steel companies continues to be challenging.Rodolfo R. steel given the former’s superior supply side equation. For company-specific expectations. on the other hand. 2 . The near term is expected to be volatile given increasing noise in China. We need further supply discipline from steel players in China to see any improvement in pricing power – and softening raw material prices are unlikely to help in the near term.r.angele@jpmorgan. and the quarter should see stable to slightly lower prices. Management will likely guide for the challenging environment to continue and for 4Q to be worse than 3Q. Specifically for the Brazilian flat steel producers. as well as increased cost pressures across the board. From a fundamental perspective. CFA (55-11) 4950-3888 rodolfo. but we remain confident about the medium. but we prefer to be more watchful in the very short term (especially on the iron ore side) until we see signs of stability in Chinese demand. while any potential price increases should be elusive given ongoing destocking as well as softening steel prices internationally.to long-term growth outlook for commodities. Steel. we continue to prefer miners vs.
1. Update on the SPCC penalty and the timeline for appeal 3. 3 . De Angele. in our view. Update on SCCO/Asarco combination 2.740 1. partially offset by slightly lower prices vs. Update on the water situation in Peru. Evolution of grades at their mines 3.919 1.520 11. CFA (55-11) 4950-3888 rodolfo. Management commentary on pricing mechanisms and demand. Flattish results coming from railroad division.246 3% 10% 7% 45% Strong 3Q11 results. SCCO Oct 27th/28th AMC (Tentative) 1.09 336 2. esp. we expect strong 3Q11 results for MMX.000 17.894 1. Outlook on demand and ’12E production guidance TBA 1. Higher revenues. boosted mainly by higher iron ore volumes and realized prices.82 162 1.460 53% 682 6% 6% 0% 2% Mixed results. Any update on defining timelines for iron ore projects and discussions for other deals with local iron ore producers 4. Update on a larger agreement with MRS Nov 8th Watch our for: 1.028 10. AMC 362 133 37% 74 0. and progress on Tia Maria negotiations with local community 2. Capex update with timeline and potential run-ups 4. mainly driven by mining performance (through SCCO). MMX Nov 7th. 2Q.com Latin America Equity Research 26 October 2011 Table 3: Summary of our estimates and expectations for the 3Q11 earnings season for the LatAm mining companies Reporting Date JPM Estimates Revenues EBITDA EBITDA Margin Net Income EPS Copper Volumes (Ktons) Iron ore Volumes (Ktons) Consensus Revenues EBITDA EBITDA Margin Net Income JPM/Consensus Revenues EBITDA EBITDA Margin Net Income Comments Vale Oct 26th. Morgan estimates. but. Iron ore shipments and average price 3.095 57% 651 1% 5% 5% 6% EBITDA may come marginally shy of our estimates given weaker-than-expected copper prices. should not be a trigger as investors are worried about deterioration of industry fundamentals in the short term. Volumes should be higher.153 60% 691 0.264 64% 7. Copper and nickel volumes 1. Should be record results. Ramp-up of iron ore shipments and realized prices both in domestic and export markets 2. Update on the development work at Sudeste Superport 3. GMEX Oct 28th AMC (Tentative) 2. Bloomberg. from China 2.628 1.P. AMC 17.544 53% 695 0. Copper volumes should be higher QoQ as grades continue to improve.Rodolfo R.12 2. combined with higher US$ prices and some cost improvements.angele@jpmorgan. Progress on acquisition of GAP shares and the related legal matters Conference Call Details 4. should imply stronger results.r. which.44 76 80. but update on the iron ore expansion and Sudeste Superport will be the key. Potential announcement of annual capex release Oct 27th TBA Source: J.242 60% 5.908 1.456 312 124 40% NM 16% 7% -8% NM As with Vale.
61 1. Number of new CPP contracts 2. such as the mining business and rolling capacity 4.com Latin America Equity Research 26 October 2011 Table 4: Summary of our estimates and expectation for the 3Q11 earnings season for the LatAm steel companies Reporting Date JPM Estimates Revenues EBITDA EBITDA Margin Net Income EPS Steel Volumes (Ktons) Refractory Volumes (Ktons) Iron ore Volumes (Ktons) Consensus Revenues EBITDA EBITDA Margin Net Income JPM/Consensus Revenues EBITDA EBITDA Margin Net Income Comments CSN** Oct. Overall EBITDA is expected to be lower QoQ. Higher volumes and prices for iron ore should be offset by weaker steel segment results that should suffer with higher costs and weaker volumes amid an environment of stable to weakening average realized prices. Steel prices and demand in Mexico and Argentina 3.651 39% 887 0. **CSN iron ore volumes to 3rd parties. More disclosure on the mining business 3. Further info on the mining business 4. Capacity utilization rates 2. 4 . In Brazil.172 2. Moreover.11 1.787 1.217 14% 481 0. but only includes 60% of Namisa. Impact of higher raw material costs 3. higher raw materials costs and marginally lower average steel prices should help keep margins under pressure. AMC 581 84 14% 22 0.780 9. Update on the stake in Usiminas and future course of action Conference Call Details 4. US division will likely to continue pushing down company's overall firstname.lastname@example.org 39% 748 2% 1% -1% 19% Mixed results. Impact of higher raw material costs 4. Impact of cost on margins (steel) 3. and trend 2. driven by seasonal effect coupled with lower prices.247 337 15% 116 3% -6% -9% 3% Higher costs due to slab purchases should contribute to weak sequential results. we expect lower volumes. 2012 guidance Oct. 1. Update on local steel prices 2.P. driven by seasonal effect coupled with flattish prices. stable volumes and lower average prices sequentially. with marginally weaker margins. In Brazil. will likely result in lower margins. Specialty to remain most profitable business. 2012 guidance Nov 8th Magnesita Nov 9th. Besides. we expect lower volumes.315 317 14% 120 0. Watch our for: 1. US/Europe division will positively impact company's results. BMC 8. CFA (55-11) 4950-3888 rodolfo.971 366 12% 280 9% -4% -11% -59% A sequentially weaker 3Q and the company is likely to miss our estimates on weaker than expected domestic volumes driven mainly by destocking of distributor inventories in 3Q.07 287 571 88 15% 28 2% -5% -6% -21% Weak result sequentially.206 6.r. More disclosure on investments. 2012 guidance Nov 10th 1. BMC 2. Morgan estimates. and higher costs. 28th Ternium Nov 2nd.60 2.041 1.Rodolfo R.251 14% 396 -3% -3% 0% 21% Weak results in divisions.225 352 11% 114 0.244 1. 27th.329 4. 2012 guidance Nov 2nd 1. Usiminas* Nov 8th.144 1. Iron ore shipments and average price 2. and capex update (steel mill in Brazil) 4. Bloomberg. 2012 guidance Nov 10th Source: J.28 4. due to BRL depreciation. AMC 4. De Angele. Guidance on the use of cash. 1. Note: *Usiminas iron ore volumes to 3rd parties. Average local price and steel sales mix 3. Result by segment.679 330 2. BMC 3. Gerdau Nov 10th.
securities-related: Vale ON. CFA (55-11) 4950-3888 rodolfo. Important Disclosures Lead or Co-manager: J.8 OW $31.50 30.86 14. the Brazilian primary analyst signing this report declares: (1) that all the views expressed herein accurately reflect his or her personal views about the securities and issuers. price data adjusted for stock splits and dividends. and the services provided were non-securities-related: Vale ON. Morgan currently has.1 $47.73 24. and (2) no part of any of the research analyst's compensation was.02 27.30 27.15 33.97 28. Southern Copper Corporation.5 OW $23. Securities-Related: J. II of Instruction 483. (2) that all recommendations issued by him or her were independently produced.50 31.5 OW OW $49. Vale ON (VALE/$24.50 35. or had within the past 12 months. or intend to seek.5 $47.80 19. or had within the past 12 months. 2010. Client: J. Morgan.00 39. Morgan has received compensation in the past 12 months for products or services other than investment banking from Vale ON.5 N $23. Client/Non-Securities-Related: J.89 24. Vale ON (VALE) Price Chart Date 25-Sep-02 Rating Share Price ($) OW OW OW OW OW N OW OW OW OW N N N OW OW OW 10.50 75 OW $23. Investment Banking (next 3 months): J.P. including from the entity in which he or she is an employee. De Angele.50 46. and the services provided were non-investment-banking.91/Overweight).9 OW $46.P.P.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Vale ON within the past 12 months.09 13. 5 .5OW $39. the following company(ies) as investment banking clients: Vale ON.com Latin America Equity Research 26 October 2011 Companies Recommended in This Report (all prices in this report as of market close on 25 October 2011) Southern Copper Corporation (SCCO/$28. Morgan currently has.14 11.09/Overweight) Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or. Initiated coverage Sep 25.Rodolfo R.10 47.P. is.P. the following company(ies) as clients. or had within the past 12 months. or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.50 email@example.com 22-Dec-06 OW 07-Feb-07 17-Apr-07 09-Jul-07 14-Sep-07 03-Oct-07 11-Apr-08 02-Sep-08 16-Oct-08 19-Nov-08 20-Feb-09 03-Aug-09 08-Oct-09 60 OW $19.95 25.80 23.36 26.5 OW OW $39.30 36. where multiple research analysts are primarily responsible for this report.5 45 Price($) 30 OW $17. 2002. Southern Copper Corporation.r.P.90 31.3 N $31.5 OW $45 OW $42 OW $50.50 39.25 32.5 OW $30.60 19. Morgan expects to receive. In compliance with Instruction 483 issued by Comissao de Valores Mobiliarios (the Brazilian securities commission) on July 6.96 20. with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers.40 18.50 23. Morgan currently has.24 30. or had within the past 12 months.55 11. Non-Investment Banking Compensation: J. the following company(ies) as clients: Vale ON.5 N $18. Morgan received in the past 12 months compensation for investment banking Vale ON. compensation for investment banking services in the next three months from Vale ON.P.4 OW $35.8 OW $27. and (3) that he or she will set forth any situation or conflict of interest believed to impact the impartiality of the recommendations herein.50 24.61 16. Morgan currently has.5 $38 OW OW $48 15 0 Sep 06 Jun 07 Mar 08 Dec 08 Sep 09 Jun 10 Mar 11 10-Dec-09 OW 12-Mar-10 12-Apr-10 04-Jun-10 Source: Bloomberg and J.68 23. the research analyst denoted by an “AC” on the cover or within the document individually certifies. as per article 17. Client/Investment Banking: J.54 Price Target ($) 17.P.68 N $24. Investment Banking (past 12 months): J. the following company(ies) as clients. Southern Copper Corporation. Client/Non-Investment Banking.
Grupo Mexico (GMEXICOB. 2008.SA).8 UW $23 N $38. price data adjusted for stock splits and dividends.50 46.22 28.P. CSN (SID). Magnesita (MAGG3. 6 .53 27.3 UW $16.MX). our Overweight rating falls into a buy rating category.50 36.00 14-Mar-08 51 Price($) 34 UW $30.P.SA). Usiminas (USIM5.29 11.] In our Asia (ex-Australia) and UK small. Metalurgica Gerdau (GOAU4. J.P. Rodolfo R: Bradespar (BRAP4.00 47.r.50 85 UW $33.00 42. Morgan ratings: OW = Overweight.P.and mid-cap equity research.59 25.00 47. we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.00 27.SA). Southern Copper Corporation (SCCO).80 23.5 $52 N OW $47 18-Nov-08 28-Jul-09 09-Oct-09 22-Apr-10 10-Dec-09 UW 04-Jun-10 18-Oct-10 27-Jan-11 05-Aug-11 Oct 06 Jul 07 Apr 08 Jan 09 Oct 09 Jul 10 Apr 11 17 0 Source: Bloomberg and J. the certifying analyst’s coverage universe can be found on J. Initiated coverage Mar 14.] Underweight [Over the next six to twelve months.5 Rating Share Price ($) UW UW UW UW N N N N OW 36. The chart(s) show J.SA). not to those analysts’ coverage universe.5 Date 68 UW $27.90 32. (GGBR4.82 31.67 29. the current analysts may or may not have covered it over the entire period.] Neutral [Over the next six to twelve months.27 42.00 50.P.com Latin America Equity Research 26 October 2011 12-Jul-10 21-Sep-10 22-Oct-10 14-Apr-11 21-Jul-11 01-Aug-11 Southern Copper Corporation (SCCO) Price Chart OW OW OW OW OW OW 25.65 33. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* *Percentage of investment banking clients in each rating category.50 38. 2011 Overweight (buy) 47% 51% 45% 70% Neutral (hold) 42% 44% 47% 60% Underweight (sell) 11% 33% 7% 52% J. For purposes only of FINRA/NYSE ratings distribution rules. De Angele. Morgan uses the following rating system: Overweight [Over the next six to twelve months. our Neutral rating falls into a hold rating category. Morgan Equity Research Ratings Distribution. CFA (55-11) 4950-3888 rodolfo.57 33. Coverage Universe: Angele.angele@jpmorgan.SA).33 32.P.5 N $46.P. Gerdau S.98 Price Target ($) 30.Rodolfo R. and our Underweight rating falls into a sell rating category. MMX (MMXM3.SA).26 32.07 32.17 44. www. Ternium (TX).com. If it does not appear in the Important Disclosures section of this report. we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe. Morgan. Vale ON (VALE). we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe. N= Neutral.morganmarkets.50 38.50 48. Vale PN (VALEp) J. Morgan's continuing coverage of the stocks.50 52.A. as of September 30.50 49. Morgan’s research website. UW = Underweight Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.5 N $36.50 33. each stock’s expected total return is compared to the expected total return of a benchmark country market index.30 16.
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