Table of Contents
The world needs metals like copper, iron, and cobalt, but investors don’t seem to need mining stocks. They should reconsider.
Investor reluctance is understandable. Why get exposure to an industry whose profits hinge on the health of industrial activity when the global economy seems headed for a downturn that would probably send metal prices lower?
Yet a case can be made for many resource companies. They have robust balance sheets with little or no net debt, still-solid earnings, ample reserves, and reasonably good dividends. Stock prices, though, are well below highs reached in 2021 and the first half of 2022.
That’s a good setup for diversified miners
(NGLOY); copper producer
(FCX); aluminum maker
(AA); and gold miners
“Commodity prices have come down quite a bit, and cash flows are lower, but they’re still positive in this environment,” says Chris LaFemina, a mining analyst at Jefferies.
Mining is an inherently gritty business—and not without risks. Rising costs could hurt margins. Political risks also loom large, as Chile and Peru, major sources of copper, have become less friendly to the industry in recent years, while problems exist in South Africa, a big producer of platinum and related metals. China’s economic slowdown could continue to weigh on miners, particularly Rio Tinto, which gets half its revenue there, though it also represents a big opportunity if the country’s resource-intensive economy revives.
LaFemina thinks that iron ore, which has fallen 60% from its 2021 high to about $100 per metric ton, should hold around current levels. The business remains very profitable. BHP’s and Rio Tinto’s production costs, including transportation to China, run about $40 a ton.
The long-term outlook for other metals looks strong, too. Steel, made from iron ore; aluminum; copper; nickel; and niche metals like cobalt should benefit from the transition to renewable energy. Wind farms and transmission lines are metals intensive, while electric vehicles use nearly 200 pounds of copper, four times that of internal-combustion cars.
The miners are also better equipped than they were a few years ago to wait for a rebound in prices. Like oil companies, mining companies have restrained capital spending, which should keep a lid on production and support commodity prices as companies put a priority on dividends over expanding output. Major miners are spending about half of what they did on capital expenditure a decade ago, says Charl Malan, a senior analyst of the Van Eck Global Resources fund. “We think the industry will stay the course on capital spending,” he says.
|Company / Ticker||Recent Price||YTD Change||2015 Year-End Net Debt (bil)||Current Net Debt (Cash) (bil)||2022E EPS||2022E P/E||2023E P/E||Dividend Yield||Market Value (bil)|
|Anglo American / NGLOY||$14.64||-28%||$12.9||$4.9||$3.53||4.2||5.3||8.5%||$35.9|
|BHP / BHP||49.14||-9||26.0||0.3||8.42*||6.7*||8.3*||14.3||124.5|
|Glencore / GLNCY||10.70||13||26.0||2.3||3.00||3.6||5.2||4.9||69.3|
|Rio Tinto / RIO||55.45||-16||13.8||-0.3||9.20||6.0||7.7||9.6||91.4|
|Freeport-McMoRan / FCX||28.84||-31||20.2||1.6||2.48||11.6||15.0||2.1||41.2|
|Barrick Gold / GOLD||15.06||-21||9.6||-0.6||0.94||16.1||15.6||5.3||26.6|
|Newmont / NEM||41.91||-32||3.2||1.9||2.25||18.7||19.4||5.3||33.3|
|Alcoa / AA||39.86||-33||0.6||0.3||6.32||6.3||7.4||1.0||7.2|
*For fiscal year ending June 2022 and June 2023; E=estimate; E=estimate
Sources: Bloomberg; company reports; FactSet; Jefferies
Miners’ balance sheets, too, have been bolstered by strong profits in recent years, and may be underappreciated by investors who remember the last commodity downturn, in 2015-16, when companies had to sell assets and issue equity to reduce leverage. Freeport’s debt minus cash, or net debt, is down to $1.6 billion from $20 billion at the end of 2015, while BHP’s has fallen to $300 million from $26 billion.
“BHP and Rio Tinto have strong balance sheets, good cash flow and dividends, and low-cost assets,” says Jefferies’ LaFemina. “There isn’t a lot of growth, but the market wants yield now and leverage to a recovery later. That’s what they give you.” He has a Buy rating on both stocks with price targets of $77 on BHP and $90 for Rio Tinto, up from recent prices of $49 and $54, respectively.
The dividends stand out. BHP, Rio, and several other international mining companies pay variable dividends—usually every six months—keyed to profits. Others like Freeport, Barrick, and Newmont pay a mix of regular quarterly dividends and special dividends linked to earnings. BHP’s trailing 12-month dividend is $6.50 a share, resulting in a 13% yield. LaFemina sees a yield of closer to 6% over the next year, based on targeted dividend payout ratios of 50% of earnings.
Van Eck’s Malan likes Glencore, whose profits increased ninefold in the first half of 2022, due largely to coal prices, which more than doubled. Glencore plans to wind down its coal business over the next few decades, giving it exposure to greener metals. The company is a top 10 copper producer globally, top five in nickel, and one of the top two in cobalt, which plays a key role in batteries. Glencore’s U.S. shares, at about $11, trade for four times estimated 2022 earnings and yield 5%.
Malan also likes Anglo American, a major producer of platinum and related metals, mainly palladium. It also mines iron ore, copper, and coal and is a diamond leader through its ownership of De Beers. Malan views Anglo American, whose shares trade around $15, as a good yield play with a dividend rate now around 9%.
Freeport is the world’s top copper play with mines in the U.S, Indonesia, and South America. Its profits will get dented next year as its ownership stake in the huge Grasberg mine in Indonesia, its most profitable asset, falls to 49% from 81% under a 2017 deal with the Indonesian government.
Freeport remains profitable even with copper prices at $3.50 a pound—down from a peak of $4.80 in April—given production costs of $1.50 a pound. Freeport shares, at about $30, trade for 12 times estimated 2022 earnings and yield 2% based on a 30-cent annual base dividend and a 30-cent variable one tied to earnings. “It’s a blue-chip copper company trading at a recessionary price,” LaFemina says. He has a Buy rating and $55 price target but notes that copper prices may need to rally for Freeport shares to get a lift.
But there’s more to metals than just iron and copper. Alcoa is one of the leading Western aluminum producers and benefits from a relatively low-cost position and a low carbon footprint, given its heavy use of hydropower to drive energy-intensive smelters. Barron’s wrote favorably on Alcoa when the stock traded at $55 two months ago, and it now fetches $40.
Even gold mining stocks are worth a look. Industry leader Newmont, which Barron’s recommended recently, is down 32% year to date, to $42, and Barrick is off 21%, to $15, even though gold has fallen just 9%, to $1,642 an ounce. Both are back where they traded in 2016 when gold prices were $300 an ounce lower. While costs are higher, both are profitable at current prices, with all-in costs around $1,200 an ounce; both have 5% dividends that look sustainable.
The stocks aren’t cheap based on earnings, with Newmont trading for 20 times projected 2022 profits, and Barrick, 16. But they have long reserve lives, defensive characteristics, strong balance sheets, and leverage to gold prices.
Write to Andrew Bary at [email protected]