For weeks now, I have been trying to ignore the mining stocks that pop up in my "safety and value" screen. I'm just not a metals guy. My interest in commodities begins and ends with energy. But the numbers are just too good to ignore. I'm going to stick with analysis based purely on fundamentals. Note to metals traders: I'm pretty thick skinned, so feel free to criticize.
Phoenix, Arizona based Freeport-McMoRan Copper & Gold (FCX) and its subsidiaries comprise world's largest producers of gold, copper and molybdenum in the world. Newmont Mining Corporation (NEM) is primarily a gold producer with headquarters in Denver, Colorado. Vale SA (VALE) is a Brazil-based metals and mining company that operates in over 38 countries. All data below sourced from company SEC filings, earnings call transcripts, and YCharts.
Returning value to shareholders
Dividend growth over past 10 years
Book value per share
Average annual book value change over past 10 years
All three mining companies have a long history of growth. An investment in Freeport or Vale beginning ten years ago would have returned enormous sums, if you were able to stomach the volatile nature of stocks pinned to the commodities they produce. Newmont, the least diversified of the three, has increased shareholder equity over the past decade at a rate just above gold's long-term average annualized growth rate of 7.42%. It's done that all while paying and increasing dividends.
Freeport and Vale SA have grown at a pace that caused me to check twice, because I just couldn't believe my eyes. Just to put these numbers in perspective, Apple (AAPL) over the past decade has an average annual book value per share growth of 37.19%, less than one percent above Vale's. Consumer electronics have become obsolete very quickly, but I can't imagine iron, copper, or gold going out of style, ever.
Operating Margin TTM
Return on Assets
Return on Equity
Return on Invested Capital
These margins aren't outstanding, but they are very good for their respective industries. Newmont's return on invested capital is the least exciting ratio of the three. Currently at 8.26%, with a five year average of 6.11%, this gold miner's return on invested capital is uninspiring, but you'll see later why this is my favorite of the three.
P/E Ratio TTM
Price to Book Value
Newmont redeems itself as a potential long position by trading at just 1.138 times its book value. If you're looking for steady returns without the volatility that commodity based companies typically experience, Newmont is a strong candidate. With a beta value of only 0.34, its price swings are far less erratic than the broad market.
Freeport and Vale are also cheap at the moment, but far more volatile. Freeport has a beta value of about 1.93 and Vale's is about 1.47. Whenever I'm about to get involved with a company as jumpy as these two, knowing that I'm in at just 1.4 or 1.5 times, the book value makes hanging on during temporary downturns much easier.
Debt to Equity Ratio
Net Income TTM
Freeport wins this round. Its balance sheet is about as strong as anyone could possibly hope for. Net income is enough to repay all of its long-term debt in less than a year. It's in a position to either suffer temporary losses from the commodities it produces or make large acquisitions. The reason I'm not starting a long position on Freeport just yet is because it appears to be doing both.
On December 5, 2012, Freeport announced upcoming acquisitions of both Plains Exploration & Production Company (PXP) and McMoRan Exploration Co. (MMR). All three companies share management, so it's unlikely there will be large asset write-down surprises. The advantages to the acquisition seem to stop there.
For the life of me, I can't understand why Freeport wants to hold on to McMoRan Exploration. The gulf coast oil and gas E&P company has posted losses in 16 of the past 18 years. On the surface, it seems Freeport should sever its connections with McMoRan Exploration like a gangrene infected limb.
Plains Exploration isn't much better. In its favor, it has assets in the highly productive Eagle Ford. It also has producing assets on the west coast, where gasoline and diesel are most expensive. Too bad it isn't in the more profitable refining industry.
I dove into Freeport's latest earnings call to see if I could make some sense of this huge merger. Freeport-McMoRan President and CEO Richard C. Adkerson mentioned that Freeport has been on the lookout for possible acquisitions in the mining business, but couldn't find any. If both acquisitions complete as expected, the company's operations will shift from about 30% in North America to about 50%. A majority allocation in North America should help maintain Freeport's investment grade credit rating. The company is going to need that rating to finance the $20 billion of debt it expects to incur during the merger.
I might kick myself for doing so later, but I'm going to hold off on starting a long position with this otherwise very attractive company until after the acquisitions. They are expecting them to be completed during the second quarter of 2013.
That brings us to Newmont. Richard O'Brien has recently retired and Gary Goldberg has taken over as CEO. The company's CFO, Russell Ball is leaving as well. Other than the recent leadership shake up, I can't find a good reason not to invest in Newmont that isn't related to the price of gold.
The company's five year average net income of about $1 billion is enough to pay off its total long-term debt in a little over 6 years. That's higher than I like, but going back to 1979, this is as high as it has ever been. During Newmont's latest earnings call, Goldberg reiterated several times that he intends to reduce capital spending. Given the company's wonderfully boring history of steady returns to its investors, I might be adding Newmont to my portfolio soon.
Last up is Vale SA; the enormous mining operation had an incredible run over the past few years, right up until the last half of 2012. The above tables contain numbers that only run up to Q3 2012. The company has enormous assets around the globe, but its debt compared to TTM net income is a concern. Vale's Brazilian nationality and income volatility doesn't leave me feeling secure. Its current undervalued state could be a tremendous opportunity to get in if you missed the incredible run-up over the past several years. Personally, I can't stomach Vale's earnings roller coaster, but I might ride the Newmont mule up its next mountain.
I'll bet there are heaps of commodities traders that would love to tell me none of the above matters because the Chinese Politburo has a billion tons of molybdenum stashed under their mattresses. Let the discussion begin.