With the European sovereign debt crisis potentially derailing the fragile global economic recovery and throwing global stock markets into greater disarray, investors are investing in defensive assetsincluding gold, precious metals and traditional defensive stocks such as consumer staples. However, this means that many investors are foregoing the tremendous investment and growth opportunities that exist in the resources and commodities sectors.
Due to China's massive economic expansion and large building boom the ongoing demand for raw materials and commodities is massive and there is currently little sign of this slowing. In this article I will review five mining stocks that I believe are well positioned to take advantage of this huge demand for raw materials and will continue to grow in value through 2012.
Hecla Mining Company (HL)
Hecla Mining has a market cap of $1.69 billion and is currently trading at around $6, with a price-to-earnings ratio of 14.71. Its 52-week trading range is $4.82 to $11.56. It reported third-quarter 2011 earnings of $114.55 million, a decrease from second-quarter earnings of $117.81 million. The income statement showed net income in the third quarter of $55.92 million, a substantial increase from second-quarter net income of $33.46 million. It has quarterly revenue growth of 4.1%, a return on equity of 11.89% and pays a dividend with a yield of 1.3%.
One of Hecla Mining’s competitors is Pan American Silver Corp (PAAS), which has a market cap of $2.66 billion and is trading at around $25, with a price-to-earnings ratio of 7.77. It has quarterly revenue growth of 34.1%, a return on equity of 23.13% and pays a dividend with a yield of 0.4%. This data indicates that it is outperforming Hecla Mining.
Hecla Mining’s cash position has improved in the last quarter. Its balance sheet showed $413.743 million in cash for the third quarter, an increase from $377.44 million in cash in the second quarter. The net tangible assets have also increased to $1.10 billion in third-quarter 2011, from $1.04 billion in the second quarter. Hecla Mining’s quarterly revenue growth of 4.1%, versus an industry average of 25.6%, and a return on equity of 11.89%, versus an industry average of 13.1%, indicates that it is underperforming many of its competitors.
The outlook for the silver industry is strongly positiveas demand driven primarily by investors seeking a defensive hedge against inflation and market volatility is expected to grow, as we see the twin forces of economic instability triggered by the eurozone sovereign debt crisis combined with growing inflation caused by government economic stimulus packages. Thomson Reuters in its report, "The Silver Investment Market-An Update, November 2011," stated the outlook for silver prices remains bullish, "with the potential of prices nearing, if not exceeding, the $40/oz."
When the solid increase in net income and stronger balance sheet are considered in conjunction with the positive industry outlook, Hecla Mining presents as an attractive investment opportunity. This is even more so as the stock is currently trading well below its 52-week high and this represents a buying opportunity. Accordingly, I rate Hecla Mining a buy.
BHP Billiton plc (BBL)
BHP Billiton has a market cap of $168.27 billion and currently trades at around $63, with a price-to-earnings ratio of 7.41. Its 52-week trading range is $49.90 to $86.96. First half 2011 earnings of $23.25 billion were reported, an increase from second half 2010 earnings of $21.83 billion. First-half 2011 net income was $8.12 billion, a substantial increase from second-half 2010 net income of $6.73 billion. It has quarterly revenue growth of 33.6%, a return on equity of 44.72% and pays a dividend with a yield of 3.6%.
One of BHP’s competitors is Anglo American Plc (AAUKY.PK), which has a market cap of $47.34 billion and is trading at around $20, with a price-to-earnings ratio of 5.86. It has quarterly revenue growth of 21% and a return on equity of29.09%. Based on this data BHP is outperforming Anglo American.
BHP's cash position has declined, with the first-half 2011 balance sheet showing $10.08 billion in cash, a decrease from $16.16 billion in the second half 2010. BHP’s quarterly revenue growth of 33.6%, versus an industry average of 21.7%, and a return on equity of 44.72%, versus an industry average of 24.6%, indicates that it is a well managed company that is substantially outperforming many of its competitors.
The outlook for the industrial metal and minerals industryis cautiously positive, primarily due to the high demand from China, which is being driven by its massive and rapid economic growth. Many analysts have predicted that metal prices will end the year with double-digit growth as this demand is still outstripping supply. This bodes extremely well for metals and minerals miners such as BHP.
When the positive industry outlook is considered in conjunction with BHP’s substantial increase in first-half net income, strong performance indicators and attractive dividend yield, I have no hesitation in recommending the company. Accordingly, I rate BHP a buy.
Rio Tinto Plc (RIO)
Rio has a market cap of $102.73 billion and is currently trading at around $53, with a price-to-earnings ratio of 6.53. Its 52-week trading range is $40.50 to $76.67. First-half 2011 earnings of $17.98 billion were reported, a decrease from second-half 2010 earnings of $20.04 billion. First-half net income was $4.69 billion, a decrease from second-half 2010 net income of $5.44 billion. It has quarterly revenue growth of 18.4%, a return on equity of 29.04% and pays a dividend with a yield of 2.1%.
One of Rio’s competitors is Xstrata (XTA.L), which has a market cap of $30.25 billion and is trading at around $1,033, with a price-to-earnings ratio of 577.14. It has quarterly revenue growth of 23.3% and a return on equity of 13.84%. Based on this data Xstrata has superior earnings growth but is substantially lagging on return on equity.
Rio’s cash position has declined with the balance sheet showing $4.67 billion in cash for first-half 2011, a decrease from $6.69 billion in second-half 2010. Rio’s quarterly revenue growth of 18.4%, versus an industry average of 21.7%, and a return on equity of 29.04%, versus an industry average of 24.6%, indicates that it is not delivering the same earnings growth as many of its competitors but is delivering a far superior return on equity than the majority.
As stated earlier the earnings outlook for the industrial metals and minerals industry is cautiously optimistic, primarily due to the high demand from China. Despite the positive industry outlook and RIO’s solid performance indicators, due to its decreased earnings, net income and cash holdings I believe there are better investment opportunities in the industry, such as BHP, which pays a superior dividend yield. Accordingly, I rate Rio a hold.
Vale S.A (VALE)
Vale has a market cap of $123.49 billion and is trading at around $24. Its 52-week trading range is $21.14 to $37.25. It reported third-quarter 2011 earnings of $28.01 billion, an increase from second-quarter earnings of $25.06 billion. Third-quarter net income was $7.89 billion, a decrease from second-quarter net income of $10.28 billion. It has quarterly revenue growth of 9.1%, a return on equity of 29.63% and pays a dividend with a yield of 0.2%.
One of Vale´s competitors is Cliff Natural Resources Inc (CLF), which has a market cap of $10.10 billion and is trading at around $71, with a price-to-earnings ratio of 5.45. It has quarterly revenue growth of 59.2%, a return on equity of 38.66% and pays a dividend with a yield of 1.6%. Based on these indicators it is strongly outperforming Vale.
Vale’s cash position has declined. The balance sheet showed $16.24 billion in cash for the third quarter 2011, a decrease from $22.57 billion in the second quarter. Vale’s quarterly revenue growth of 9.1%, versus an industry average of 21.7%, and a return on equity of 29.63%, versus an industry average of 24.6%, indicates that it is underperforming many of its competitors in revenue growth but delivering a superior return on equity.
The overall earnings outlook for the industrial metals and minerals industry as discussed is cautiously positive. However, despite this positive outlook, when Vale’s decreased net income and weaker balance sheet are considered in conjunction with its poor earnings growth in what is a strong operating environment for these companies I believe there are better investment opportunities in the industry. Accordingly, I rate Vale as a hold.
Southern Copper Corporation (SCCO)
Southern Copper has a market cap of $26.08 billion and is currently trading at around $31, with a price-to-earnings ratio of 11.48. Its 52-week trading range is $22.58 to $50.35. It reported third-quarter 2011 earnings of $1.75 billion, a decrease from second-quarter earnings of $1.80 billion. Third-quarter net income was $663.04 million, an increase from the second-quarter net income of $658.04 million. It has quarterly revenue growth of 38.8% and a return on equity of 57.32%. It pays a dividend and yield of 2.80 (8.90%).
One of Southern Copper’s competitors is Freeport-McMoRan Copper and Gold (FCX), which has a market cap of $32.59 billion and is trading at around $34, with a price-to-earnings ratio of 6.01. It has quarterly revenue growth of 0.8%, and a return on equity of 43.09%. Based on these indicators it is being strongly outperformed by Southern Copper.
Southern Copper’s cash position has decreased in the last quarter. The balance sheet showed $1.24 billion in cash for the third quarter, a decrease from $1.45 billion in the second quarter. The net tangible assets have increased to $3.99 billion in third-quarter 2011, from $3.90 billion in the second quarter. Southern Copper’s quarterly revenue growth of 38.8%, versus an industry average of 192.5%, and a return on equity of 57.32%, versus an industry average of 28.2%, indicates that it is underperforming many of its competitors on earnings growth but delivering a superior return on equity.
The boom in demand for resources driven by the growth of the Chinese economy indicates further opportunities for strong revenue growth. When combined with a weak dollar, that should make U.S. exports more competitive, it bodes well for commodities demand and producers like Southern Copper.
Based on the positive industry outlook in conjunction with Southern Copper’s increased net income and strong performance indicators I rate the company a buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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