Weekly Metals And Mining Notes: Newmont Mining, Cliffs Natural Resources And Alcoa

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Metals and mining stocks had an eventful week with the Goverment of Suriname exercising its option to participate in Newmont Mining’s Merian gold project, Cliffs Natural Resources announcing its intention to exit from its Eastern Canadian Iron Ore operations,  and Alcoa completing the acquisition of Firth Rixson. Here are some of the major events of the week pertaining to companies that Trefis covers in the metals and mining space.

Newmont Mining

The Government of Suriname has exercised its option to participate in Newmont Mining’s (NYSE:NEM) Merian gold project through a 25% equity stake. The most immediate benefit of the participation of the Government for Newmont is a reduction in capital outlay for Newmont. The total capital expenditure for the project is expected to range between $900 million to $1 billion. [1] With the Government’s participation, Newmont’s capital expenditure outlay for the project will be reduced to $600-700 million. [2] In addition to the lowering of Newmont’s capital expenditure and future operating expense commitments, the Government’s direct participation will reduce risk for the company and facilitate the timely completion of the project. The Government’s participation will also make it easier for Newmont to obtain various clearances and permits that are typically required during the course of the construction of a mining project. Production at the Merian mine is expected to commence in 2016. [2]

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We have a $19 price estimate for Newmont, which is slightly lower than the market price. We estimate revenues of around $7.4 billion for the company in 2014 and an EPS of $0.97, against a consensus estimate of $0.96.

Cliffs Natural Resources

Cliffs Natural Resources (NYSE:CLF) has announced that it is pursuing exit options for its Eastern Canadian Iron Ore operations. This may result in the closure of the Bloom Lake mine, Cliffs’ only operational mine in Canada. [3] The company has made the decision to exit its Eastern Canadian Iron Ore operations, as it has been unable to attract strategic investors in order to undertake Phase II expansion of the mine. The management had stated  in its Q3 earnings conference call that the ongoing Phase I operations at Bloom Lake are not economically feasible, and that it would continue to operate the mine in 2015 only if it could find equity investors for Phase II expansion by the end of the year. [4] Cliffs’ review of its Bloom Lake mine was prompted by the sharp decline in iron ore prices over the last twelve months. The decline in iron ore and metallurgical coal prices has negatively impacted Cliffs’ operations.

We have a $9 price estimate for Cliffs, which is slightly lower than the market price. We estimate revenues of around $4.3 billion for the company in 2014 and an EPS of $0.42, as against a consensus estimate of $0.13.

Alcoa

Alcoa (NYSE:AA) has announced the completion of its acquisition of Firth Rixson, a leading jet engine components manufacturer. [5] The company had announced the Firth Rixson aqcusition in June. The total consideration for the acquisition is $2.85 billion, consisting of $2.35 billion in cash and $500 million in stock. [6] In addition, there is a potential $150 million earn-out, the payment of which depends on Firth Rixson’s performance through 2020. [7]

The acquistion of Firth Rixson is a part of Alcoa’s ongoing product portfolio transformation towards value-added products, as it seeks to reduce its dependence on volatile aluminum prices. Alcoa’s shift towards value-added products is reflected in its revenue figures. The percentage contribution of value-added products, represented by the Global Rolled Products and Engineered Products and Solutions business segments, to the company’s total revenues has steadily increased. This figure stood at 52.1%, 54.4%, 55.7% and 57.1% in 2011, 2012, 2013 and the first nine months of 2014, respectively. ((Alcoa’s 2013 10-K, SEC)) [8] In calculating these figures, we have only considered third-party sales. Value-added businesses will drive Alcoa’s results in the near future, with cost reduction expected to keep its commodity businesses competitive.

We have a $16 price estimate for Alcoa, which is around 8% below the market price. We estimate revenues of $24.2 billion in 2014 for the company and an EPS of $0.89, as against a consensus estimate of $0.82.

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Notes:
  1. Newmont Welcomes Suriname’s Decision to Participate in the Merian Gold Project, Newmont Press Release []
  2. Newmont Welcomes Suriname’s Decision to Participate in the Merian Gold Project, Newmont Press Release [] []
  3. Cliffs Natural Resources Inc. To Pursue Exit Options For Its Eastern Canadian Operations, Cliffs Natural Resources News Release []
  4. Cliffs Natural Resources Q3 2014 Earning Call Transcript, SEC []
  5. Alcoa Acquires Firth Rixson, Grows Global Aerospace Portfolio, Alcoa News Release []
  6. Alcoa’s Transformation Accelerates, Will Acquire Firth Rixson To Grow Global Aerospace Portfolio, Alcoa News Release []
  7. Accelerating Alcoa’s Transformation, Alcoa Company Presentation []
  8. Alcoa’s Q3 2014 10-Q, SEC []