Mining stocks offer a cheap play on growth. To dig.
Their stocks, however, are trading at a low price, fearing that the good period for industrial commodities may end. For investors willing to accept some risk, Big Five miners offer a rich opportunity.
All five have single-digit price-to-earnings ratios, among the lowest of any major industrial group in global stock markets. And their dividends are generally more than enough. Rio Tinto’s 12-month yield is 14%.
“All stocks are attractively priced,” says Chris LaFemina, analyst at Jefferies. “Balance sheets are particularly strong and free cash flow is high. Much of the damage to inventory caused by falling iron ore prices is already being accounted for. If China stops slowing, these stocks are seriously undervalued.
A sustained economic slowdown in China is the big fear. The country accounts for about half of the world’s demand for raw materials like iron ore and copper. Iron ore prices – the biggest contributor to profits for BHP (ticker: BHP, BBL), Rio Tinto (RIO) and Vale (VALE) – have fallen 50% from spring highs, to around $ 120 per metric ton. Their descent continued last week, falling 7.5% after China reported a 13% drop in steel production in August. As a result, mining stocks have declined. BHP is 30% below its May high.
“The market is trading this on China’s next data point, when the long-term valuation argument is pretty compelling,” LaFemina said.
Even with the fall of iron ore, producers remain very profitable. BHP and Rio Tinto’s estimated all-inclusive costs, including transportation to China, are around $ 35 per tonne.
Other products are in better shape. Copper, at $ 4.30 a pound, is down 10% from its spring high, but up 20% this year. Aluminum rose 40% in 2021, while thermal coal prices doubled.
The mining industry has asserted its ecological credentials by seeking to attract socially responsible investors. “Metals and mining are essential to decarbonizing the world,” says Charl Malan, senior analyst for natural resources investment strategy at VanEck. “It goes beyond the minerals like lithium and cobalt that people talk about, and includes aluminum, copper, and platinum group metals.”
Companies are reducing the carbon footprint of their mining operations. BHP is withdrawing from oil and gas activities, while Anglo American (NGLOY) is divesting from thermal coal activities. One problem is that the production of steel from iron ore is very carbon intensive.
LaFemina argues that Anglo American and Glencore (GLNCY) are decarbonizing games because of their production of metals essential to renewable energy and electric vehicles. Glencore is the world’s largest producer of cobalt, an essential metal for batteries.
Unlike large energy companies, large mining companies generally have little or no net debt. Rio Tinto had $ 3.1 billion in net cash as of June 30, compared to about $ 57 billion in net debt for
(XOM), for example.
The combination of strong balance sheets and limited capital spending has resulted in higher dividends, especially for BHP, Rio Tinto and Vale. LaFemina calls these three companies high yield bond agents. Both BHP and Vale’s 12-month yields are around 10%.
All show restraint on capital expenditure. Malan de VanEck notes that the total capital expenditure of the five big miners, plus
(TECK), is expected to total around $ 35 billion this year, up from $ 80 billion ten years ago.
“Talk to the miners and they’ll say they’re mining for profit and not trying to get big,” he says.
The dividend policies of international miners are unfamiliar to many American investors. Most pay semi-annual dividends that fluctuate with earnings. Rio Tinto, for example, is targeting dividends of 40-60% of earnings, but it also issued a large special dividend in the first half of 2021, for a total payout ratio of 75%. American companies typically pay fixed dividends quarterly. Investors must accept the variability of dividends, but overall dividends must be generous, barring a collapse in commodity prices.
|Company / Teleprinter||Recent price||Modification of the current fiscal year||2021E EPS||2021E P / E||2022E BPA||2022E P / E||Market value (bill)||Yield*||Main commodities produced|
|Anglo-American / NGLOY||$ 18.03||ten%||$ 3.87||4.7||$ 2.80||6.4||$ 44.9||9.5%||Iron ore, palladium, copper|
|BHP / BHP group **||55.68||-15||7.84||7.1||5.78||9.6||136.6||10.8||Iron ore, copper, coal|
|Glencore / GLNCY||8.99||49||1.23||7.3||1.11||8.1||59.8||3.6||Copper, coal, zinc|
|Rio Tinto / RIO||68.05||-6||14.90||4.6||10.72||6.3||111.6||14.2||Iron ore, copper, aluminum|
|Vale / VALE||16.26||-3||5.40||3.0||4.12||4.0||85.9||10.0||Iron ore, copper, nickel|
E = estimate; * The last 12 months; ** EPS and P / E estimated for June 2022 and year-end June 2023
Sources: Bloomberg; FactSet
Here’s a look at the Big Five of mining:
BHP generated about 70% of its profits from iron ore in its fiscal year ending in June. The Australian company is also one of the largest copper producers in the world, thanks to its majority stake in the huge Escondida mine in Chile.
The company plans to consolidate its dual listed shares in Australia and UK with Australian stocks, thereby simplifying its structure. There are now US listed certificates of deposit for Australian stocks, traded under the symbol BHP, and UK stocks, with a BBL symbol. LaFemina favors BBL stocks, which are trading around $ 53, a $ 3 discount from BHP stocks.
“American investors should favor BBL because its stock is cheaper and has the same dividend,” he says. The gap between BHP and BBL is expected to close if shareholders approve the share class consolidation next year.
BHP is valued at roughly six times projected earnings for the fiscal year ending June 2022. BHP generously distributed 90% of its earnings, or $ 4 per US share, in dividends for the first half of 2021.
Australia-based Rio Tinto is the only one of the five not exposed to fossil fuels, a plus for socially conscious investors. Like BHP, Rio Tinto derives a large portion of its profits (around 75%) from iron ore. It is also a major producer of copper and aluminum. His 2007 contract for
is finally paying dividends, with aluminum prices up 40% this year, to around $ 1.30 a pound.
Malan de VanEck loves Rio Tinto, saying it is cheap and has led the industry in debt reduction. U.S. stocks, at around $ 68, are trading five times the 2021 forecast earnings of $ 15 per share and six times the 2022 estimated earnings.
With little else to do with its free cash flow, Rio Tinto pays it: $ 5.60 in dividends in the first half of the year. LaFemina sees $ 11 per share in earnings for 2022, and that assumes iron ore prices at around $ 130 a tonne, not far from current levels.
Anglo American, founded over a century ago in South Africa by Ernest Oppenheimer, is more diverse than BHP and Rio Tinto, deriving around 40% of its profits from iron ore.
The London-based company is the only major mining company to have significant exposure to platinum group metals (platinum, palladium and rhodium), and it controls DeBeers, the world’s leading diamond company.
“Among the Big Five, Anglo stands out for its growth,” says LaFemina. The company owns a majority stake in a large Peruvian copper mine which is expected to start production in 2022, and which could help increase its copper production by 40% by 2023. With net debt reduced to $ 2 billion, Anglo American increased its dividends in the first half of 2021, paying almost $ 1.25 on its US-listed stocks, which are now trading around $ 18.
Prices for platinum and related metals have fallen recently, reflecting lower demand from the automotive sector. Metals are used for catalytic converters. As a result, the stocks are trading low, at around five times the expected earnings in 2021 and six times the estimated earnings in 2022.
Glencore is the only mining giant that does not mine for iron ore. It is a major producer of base metals, including copper, zinc and nickel. The company is the “hands down” favorite of RBC Capital Markets analyst Tyler Broda. “His commodities are in a different part of the cycle,” he says.
One of the world’s largest coal producers, Glencore has rejected calls to quit the industry. It has benefited from the doubling of prices this year for thermal coal, used by electricity companies.
Glencore also has an attractive commodities trading business which generated nearly $ 2 billion in operating profits in the first half of the year.
The company’s U.S.-listed shares, recently priced at $ 9 on the Pink Sheets, near their 52-week high, are hitting eight times the 2022 consensus forecast earnings.
Based on current commodity prices, Broda says, Glencore is valued at just under three times annual earnings before interest, taxes, depreciation and amortization, or Ebitda.
Glencore increases its distributions (the equivalent of dividends) and initiates a share buyback program due to higher earnings and reduced net debt. The current yield is around 3%, based on expected payouts in 2021.
One of the risks is a US Department of Justice investigation into its international business operations. LaFemina sees a settlement, with a fine of $ 1 billion to $ 2 billion.
Vale, the world’s largest producer of iron ore, is the largest Brazilian company with $ 85 billion. Its stock, at around $ 16, is down from a high of $ 23 in June and is trading for just three times the expected earnings in 2021 and four times the estimated earnings in 2022.
Citigroup analyst Alexander Hacking recently wrote that Vale “has an attractive mid-sized base metals business,” including a large nickel operation that is not reflected in its share price. It has a buy rating and a target price of $ 22.
RBC’s Broda considers Vale cheap, with 15% expected free cash flow for 2022, assuming an iron price of $ 110 per tonne, lower than current spot prices.
Vale, however, was plagued by mining disasters, including one in Brazil in 2019, when a dam containing mining waste collapsed and killed 270 people.
Write to Andrew Bary at [email protected]