Week of September 16, 2013 Analysts Ideas of the Week Anglo American walks away from Pebble www.researchfrc.com Sid Rajeev, B.Tech, MBA, CFA Head of Research Anglo American walks away from Pebble Last week, Anglo American (LSE: AAL) announced their decision to walk away from the Pebble mine in the Bristol Bay region of Alaska. Anglo American had a 50% interest in the project. Increasing environmental risks, and the negative sentiment towards the project from the communities in the neighborhood are cited as being the main reasons that prompted Anglo American to walk away. The company now has to pay a $300 million fine/penalty to its partner, Northern Dynasty Minerals (TSX: NDM). The giant Pebble mine is expected to hold 5.94 billion tonnes of measured and indicated resources, which includes 55 billion lbs of copper, 67 million oz of gold, and 3.3 billion lbs of molybdenum. Inferred resources are estimated at 4.84 billion tonnes, including 26 billion lbs of copper, 40 million oz of gold, and 2.3 billion lbs of molybdenum. Anglo American had entered into a JV partnership with Northern Dynasty in 2007. Since then, Anglo has put $1.5 billion into the project. Including the $300 million penalty, the $1.8 billion investment, clearly, has not been a good one for Anglo American. Rio Tinto (LSE: RIO), who owns approximately 20% of Northern Dynasty, is now the main contender to advance the project. Another development for a major mining project in the past week was related to the North Yorkshire potash project in the UK. It seems like the project will now take much longer to go into production due to environmental concerns. Like the Pebble project, the North Yorkshire project looks extremely robust on paper as the highlights on the next page suggest.
Page 2 Initial CAPEX - US$1.7 billion First production targeted to commence in Q4 2016 (which might now be delayed) Production ramp up to 5mtpa by 2018 Estimated operating cost of US$37/tonne of Polyhalite After-tax net present value (first phage) of US$2.6 billion As companies shift their focus to streamline operations. and improve their overall efficiency to combat the highly uncertain direction of commodity prices, I estimate we are going to see more and more projects put on the backburner. Daniel Iwata, BA, Dip. Fin. Mgmt. Equity Research Associate Cloud security As I discussed last week, cloud computing is a rapidly growing industry. Although the adoption rate has been growing, I believe that security concerns dampen the growth rate to an extent. Multiple surveys have shown that around 45% of IT leaders or decision makers have slowed or stopped their adoption of cloud services due to security concerns. Therefore, we feel that this segment of cloud computing offers an attractive growth opportunity within the cloud computing space. Since Cloud services are used through the internet, and the data can be accessed through multiple devices, location and security are a major concerns. Cloud security firms specialize in software security, firewall security, assessment of cloud security and security monitoring. Increasing in popularity is cloud security firms partnering with cloud service providers to offer a comprehensive package. TechNavio, a technology research firm, forecasted that the global cloud security software market will grow at CAGR of 49.4% from 2012-2016. 451 Research, who specializes in analyzing emerging technologies, estimated that by 2016, cloud enabling services would be a $22.6 billion dollar industry, from $10.6 billion in 2012. Within this industry, they listed 8 sub-sectors. The sub-sector of security was the fastest growing at a 29% CAGR from 2012-2016. Cloud enabling industry estimates are shown in the graph on the next page.
Page 3 Source: 451 Research In this space, the major software companies take up the majority of revenue. 451 estimated that those with 500+ million in Cloud enabling revenue took up 72% of the market. Established large cap companies in this space would include Akamai Technologies (NASDAQ: AKAM) and CA technologies (NASDAQ:CA). A majority of the up and coming cloud security firms are private. A micro-cap company that offers direct exposure to this industry is Cloud Security Corporation (OTCBB: CLDS). CLDS is developing a USB device that acts as a secure key for remote access to the Cloud. The company is development stage, and recently closed a $2 million financing. Pooneh Ruintan, MEcon. Msc. Finance Equity Research Associate The new Fed decision and its effects on the interest rates and housing market On September 18, 2013, the Federal Open Market Committee unexpectedly refrained from reducing the $85 billion pace of monthly bond buying; the committee announced it will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion, and longer-term Treasury securities at a pace of $45 billion
Page 4 per month. The main reasons behind this decision are as follow: The Committee sees improvement in economic activity, and labour market conditions since it began its asset purchase program a year ago, but, the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth as builders began work on fewer U.S. homes. Due to changes in energy prices, inflation has been running below the Committee's longer-run objective of 2%. The Committee recognizes that inflation persistently below its objective could pose risks to economic performance. However, it also anticipates that inflation will move back toward its objective over the medium term. The tightening of financial conditions observed in recent months, if continued, could slow the pace of improvement in the economy and labour market. Some of the expected effects are as follow: Economic growth: Fed officials reduced their forecasts for economic growth in 2013 and 2014. They forecast U.S. GDP increases of 2%-2.3% this year, down from a June 2013 projection of 2.3% -2.6%. Rate outlook: As a result of this decision, the central bank s outlook on its target interest rate will remain near zero at least as long as unemployment remains above 6.5%, and the outlook for inflation is no more than 2.5%. Bond yield: The yield on the 10-year Treasury note increased about 1% from May 2013 to date, with yields on September 6, 2012, increasing to 3% on an intraday basis for the first time since July 2011. That compares with records low of 1.61% on May 1, 2013, and 1.38% in July 2012. We are expecting bond yield to go down as a result of the Fed policy. Mortgage rate and housing starts: The average interest rate on a 30-year fixed home loan at the US banks was 4.57% last week, compared with a record-low of 3.31 % in November 2012. Also, although the median estimate of 83 economists surveyed by Bloomberg was that housing starts will rise by an annual rate of 917,000, starts rose lower than expected (891,000 annual rate). Moreover, housing permits dropped more than forecast. We believe this new decision will reduce the pressure on mortgage rates and will support housing starts.
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