BHP Billiton boss Andrew MacKenzie made a bold claim during a recent Melbourne Mining Club dinner in London, stating "Investors are concerned about oversupply, and yet customers, policymakers and NGOs fear scarcity. Popular opinion has it that our industry is fundamentally unsustainable, because the world, they believe, is running out of resources. Popular opinion in this case is plain wrong." The former academic and geologist insisted that human ingenuity would lead to the discovery and extraction of natural resources in more economic and efficient ways.
Whether or not investors agree with Mr. MacKenzie's view on the world's supply of natural resources, there are certainly opportunities for them within this sector. To create the list below we began by searching for companies focused on mining or producing basic materials that are trading at significant discounts to their fair value based on analyst target price, with the assumption that they will move up to their fair value in the near future.
We only included stocks with five or more analyst ratings, and because analyst prices are notoriously inflated, only those that imply a potential upside of at least 15% based on the lowest target price.
We also screened our list for above average returns, including: Return on Assets (ROA), the result of dividing a company's annual earnings by its total assets, Return on Equity (ROE), which looks at how much profit is generated from shareholder investments, and Return on Investments (ROI), a measure of profitability that is calculated by dividing net profits by total assets.
Among the companies that remained, we decided to look closer at three operating in the mining and or production of metals, specifically aluminum, gold and silver.
For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.
Do you think these stocks will rise above their target prices? Use the list below as a starting point for your own analysis.
1. Noranda Aluminum Holding Corp. (NOR): Engages in the production and sale of primary aluminum products and rolled aluminum coils in the United States.
- Market cap at $272.92M, most recent closing price at $4.02
- P/E: 8.35
- Forward P/E: 45.44
- PEG: 0.83
- EPS: 0.49
- EPS this year: -65.26%
- EPS next year: 156.20%
- EPS past 5 years: -7.10%
- EPS next 5 years: 10.00%
- ROA: 2.44%; compared to Aluminum industry average of 1.12%
- ROE: 21.54%; compared to Aluminum industry average of 5.59%
- ROI: 2.89%; compared to Aluminum industry average of 1.34%
- Of the 6 analysts that have set a target price on the stock, the lowest price target stands at $5. This implies a potential upside of 23.76% from current levels around $4.04.
NOR has recorded great gains over the last month, when compared to its closest competitors. The stock returned 5.96% since 5/6/13, better than Alcoa Inc. (AA), Aluminum Corporation Of China Limited (ACH) and Alumina Ltd. (AWC), which returned -3.23%, 1.49% and 0.25% during the same holding period.
The company recently announced its subsidiary Noranda Aluminum Acquisition Corporation entered into an incremental term loan facility, under its existing term loan credit agreement, worth $50M, which will mature in 2019. According to President and Chief Executive Layle K. Smith, "These transactions supplement ongoing operational actions to drive incremental efficiencies and cost savings as we manage our liquidity and preserve our financial flexibility".
2. Allied Nevada Gold Corp. (ANV): Engages in the evaluation, acquisition, exploration, and advancement of gold exploration and development projects in the state of Nevada.
- Market cap at $870.60M, most recent closing price at $8.38
- P/E: 17.51
- Forward P/E: 5.72
- PEG: N/A
- EPS: 0.49
- EPS this year: 29.87%
- EPS next year: 72.41%
- EPS past 5 years: 5.95%
- EPS next 5 years: N/A
- ROA: 4.47%; compared to Gold industry average of -4.35%
- ROE: 7.35%; compared to Gold industry average of -7.68%
- ROI: 4.83%; compared to Gold industry average of -5.08%
- Of the 9 analysts that have set a target price on the stock, the lowest price target stands at $9.71. This implies a potential upside of 25.78% from current levels around $8.08.
ANV has returned -12.18% since 5/6/13, and is underperforming compared to peers in its industry. The stock is falling behind companies like Midway Gold Corp. (MDW), Newmont Mining Corp. (NEM) and Barrick Gold Corporation (ABX), which returned 16.49%, 4.17% and 3.62% during the same time period.
At the end of May, ANV made new options available, for the January 2015 expiration. As Forbes notes, investors have nearly 600 days until expiration, allowing those selling puts or calls to potentially reach higher premiums.
3. Coeur d'Alene Mines Corporation (CDE): Engages in the ownership, operation, exploration, and development of silver and gold mining properties located primarily in South America, Mexico, the United States, and Australia.
- Market cap at $1.46B, most recent closing price at $14.40
- P/E: 22.48
- Forward P/E: 9.92
- PEG: 0.32
- EPS: 0.64
- EPS this year: -47.87%
- EPS next year: 55.91%
- EPS past 5 years: -11.70%
- EPS next 5 years: 70.81%
- ROA: 1.71%; compared to Silver industry average of 0.18%
- ROE: 2.63%; compared to Silver industry average of 1.92%
- ROI: 1.82%; compared to Silver industry average of 1.09%
- Of the 7 analysts that have set a target price on the stock, the lowest price target stands at $16.5. This implies a potential upside of 16.28% from current levels around $14.19.
CDE has performed poorly since 5/6/13, especially when compared to industry competitors. The stock returned -5.08% over the last month, much lower than Hecla Mining Co. (HL) and Silver Wheaton Corp. (SLW), which returned 14.12% and -1.36% during the same time period. Only First Majestic Silver Corp. (AG) performed worse, returning -5.93%.
The company has been recognized with three awards from the International Society of Mine Safety Professionals, for its North and South American operations. Marking the period ending 12/31/2013, the awards acknowledge the Rochester mine in Lovelock, Nevada, Martha mine in Gregores, Argentina and Coeur exploration group in Temoris, Mexico.
*Target price data sourced from Yahoo! Finance, accounting data from Google Finance, all other data sourced from Finviz.