The global macroeconomic conditions continue to improve with China of course leading the charge. A strong economy is typically associated with strong activity in the industrial sectors which use a lot of raw materials such as copper, steel, and aluminum which in turn boost prices for those metals and increase shareholder returns of companies involved with those metals.
The two largest economies in the world belong to the U.S. and China. Q4 GDP for the U.S. was a -0.1% but some called it the "best looking contraction" in GDP as the downturn was led by the private inventory investment, in federal government spending, in exports, and in state and local government spending. Government spending and inventory investment are both known to be very volatile components of the GDP. Despite the contraction, analysts were decidedly bullish. One analyst said that the report suggests upside risk to its forecast of 1.0% for Q1 GDP. Another said that the "overall, the details of the GDP report are clearly better than the unpleasant headline figure suggests." A third one said that "once you take a deep breath, read past the headline, and delve into the numbers, you'll see that this is actually a pretty good report."
China's Q4 GDP figures were much more straightforward. GDP rose 7.9% y/y versus expectations of a 7.8% rise. Industrial production, the key driver of metal consumption, rose 10.3% y/y. The figures were strong and a BofA economist said that more upside to growth is expected from here with GDP growth peaking at 8.3% in 1H13 and slowing down to 8.0% in 2H13. The economist noted that investors should remain bullish in 1H13. DBS Vickers economist Chris Leung thinks infrastructure investment is still a bullish theme and said that there are signs that fixed asset investment is already picking up in the non-transport infrastructure space. Leung concluded that the economic "slowdown has run its course."
With that said, here are five metal miners that stand to gain from the strengthening of the global macroeconomic conditions:
Alcoa (AA) is the world's leading producer of primary and fabricated aluminum, as well as the world's largest miner of bauxite and refiner of alumina. In addition to inventing the modern-day aluminum industry, Alcoa innovation has been behind major milestones in the aerospace, automotive, packaging, building and construction, commercial transportation, consumer electronics and industrial markets over the past 125 years. Among the solutions Alcoa markets are flat-rolled products, hard alloy extrusions, and forgings, as well as Alcoa wheels, fastening systems, precision and investment castings, and building systems in addition to its expertise in other light metals such as titanium and nickel-based super alloys.
Alcoa is already seeing the pickup in demand and it showed in the company's Q4 results and 2013 outlook. Excluding the net positive impact of special items, income from continuing operations was $64 million, or $0.06 per share compared to a loss from continuing operations of $143 million in third quarter 2012, and a loss of $193 million in fourth quarter 2011. And the growth is expected to continue. In 2013, Alcoa sees global aluminum demand growth of 7%, up from 6% in 2012 and ahead of the 6.5% rate required to meet the company's forecast of a doubling in global aluminum demand between 2010 and 2020. Aluminum demand grew 10% in 2011 on top of 13% growth in 2010.
On the valuation front, AA is trading at a very reasonable figure of 0.71, suggesting that the market thinks that Alcoa's assets are worth less than Alcoa invested in them. Looking at the chart, it looks like Alcoa is moving closer to hitting the $8.50 support level.
Freeport McMoRan (FCX) is a leading international mining company with headquarters in Phoenix, Arizona. FCX operates large, long-lived, geographically diverse assets with significant proven and probable reserves of copper, gold and molybdenum. FCX has a dynamic portfolio of operating, expansion and growth projects in the copper industry and is the world's largest producer of molybdenum. The company's portfolio of assets includes the Grasberg minerals district, the world's largest copper and gold mine in terms of recoverable reserves; significant mining operations in the Americas, including the large scale Morenci and Safford minerals districts in North America and the Cerro Verde and El Abra operations in South America; and the Tenke Fungurume minerals district in the Democratic Republic of Congo.
FCX, historically a copper stock, is in the midst of a becoming a more diversified multinational with its December announcement of $20 billion in acquisitions. The combined company is expected to be a premier U.S.-based natural resource company with an industry leading global portfolio of mineral assets, significant oil and gas resources and a growing production. Still, copper will be a big part of the company. In its Q4 release, the company said that it continues to achieve strong and safe production while aggressively managing costs and executing on financially attractive projects to grow our copper production from 3.66 billion pounds in 2012 to over 5 billion pounds per annum in 2015.
Currently, FCX trades at a bargain valuation of just 7x forward 2013 EPS, typically a multiple reserved for low quality companies. The chart shows that FCX has had a tough 52 weeks, especially with that December acquisition-based drop. The stock is approaching the strong $32 support level that may produce a bounce.
Swingplane Ventures (OTCQB:SWVI) is another copper stock that has been mired in some controversy, although it appears to be undeservedly so with large research shops such as Zacks providing research coverage. Swingplane is committed to increasing current production on the Algarrobo Property, Chile, to a higher level, resulting in a more significant operation. A due diligence property evaluation suggests there is a significant opportunity to further develop the mineral potential of the property and dramatically increase the current level of production. In addition, current, limited production emphasizes recovery and sale of high grade copper ore at an average grade of 9% Cu.
Swingplane recently announced that it is currently undertaking mapping of the veins exposed on, and immediately adjacent to, the property to establish continuity and grade of the veins at surface. Mapping will be accompanied by additional sampling to further assess the nature of mineralization characterizing each vein exposure. In addition, sampling will include analysis for Rare Earth Elements and Platinum Group Elements, together with cobalt, gold, molybdenum and silver to evaluate the potential for these metals as co-products and/or by-products to primary copper production.
Recent comments from Zacks included commentary that the company should begin copper production in 2013. Zacks said that even though Swingplane is in the development stage of resource exploration and delineation, which will require several rounds of financing, its option on a past producing property should permit limited copper production in 2013 due to the Chilean government's unique promotion of the copper industry. As with all microcaps, SWVI may be subject to risks associated with investing in very small companies. The chart is suggesting that some upside may be in store after today's big fall as SWVI is coming closer to its key $0.40 support level which should provide a wave of new buyers.
Steel Dynamics (STLD) is the only steel stock on the list but also has copper exposure. The company is one of the largest domestic steel producers and metals recyclers in the United States based on estimated annual steelmaking and metals recycling capability, with annual sales of $8.0 billion in 2011, over 6,500 employees, and manufacturing facilities primarily located throughout the United States (including five steel mills, six steel processing facilities, two iron production facilities, over 70 metals recycling locations and six steel fabrication plants).
STLD blew out Q4 EPS estimates, reporting earnings of $0.20 a share versus the analyst estimate of earnings of $0.15 a share. The company noted that "in our December guidance, we suggested that metals recycling was expected to deliver a stronger financial performance in the fourth quarter, and the team's execution was even better than anticipated … Increased copper margins provided the most notable improvement, as global copper prices increased based in part on improved demand from China … Our steel operations also showed improvement … as improvements in sheet steel volumes more than offset weaker long product shipments and lower overall steel metal spreads. Automotive and manufacturing provided improved sheet demand …" As with Alcoa, the company is also seeing improved demand with the pickup in the economy. Looking forward, Steel Dynamics said that "recent housing start data suggests potential improvements in residential construction, and there are areas across the U.S. indicating signs of strengthening in the nonresidential construction sector, although levels remain historically low. "
STLD is trading at a forward P/E multiple of 13x, a low figure compared to its larger steel competitors that are sporting much more favorable multiples, suggesting upside in the stock. Investors are starting to notice STLD's cheap valuation and have bid the stock up with it now trading just under 52 week highs. The pullback to the $15 level may provide an opportunity for opportunistic investors to jump on the well-established uptrend.