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Summary

  • These three companies have a 10-20% implied upside potential should they converge to the median of their peers.
  • My favorite of these three companies has a dividend yield of 2% and an earnings payout ratio of only 30%.
  • Investment in these companies could result in more than an additional $20,000 over the next decade in dividends compared to their peers.

I am always on the lookout for appealing, undervalued investment opportunities like the ones I introduced in 4 Dividend Aristocrats You Should Consider Buying, while continually trying to avoid purchasing overvalued companies like those in 2 Electric Utilities You Should Avoid.

This article identifies the 3 mining companies which appeared most often among top 20% of mining companies when looking individually at:

  • percent above 52-week low;
  • dividend yield;
  • earnings payout ratio;
  • price to earnings;
  • price to sales; and
  • price to book.

METHODOLOGY

Bloomberg was used to obtain the list of companies classified as a mining company (diamonds/precious stones, diversified minerals, gold mining, metal-aluminum, metal-copper, metal-diversified, mining services, non-ferrous metals, platinum, precious metals, quarrying and silver mining), which resulted in a list of hundreds of companies currently traded on an American exchange. To quickly eliminate irrelevant companies I removed companies which had:

  • a share price less than $0.01;
  • no 52-week high/low data;
  • no price to earnings, price to book or price to sales data;
  • no dividend yield;
  • and an average trading volume of less than 10, 000 shares.

Applying these quick filters distilled the original list of one hundred companies down to the list of 22 companies analyzed in this article. These 22 mining companies were compared against each other using the six metrics listed above. All metric and trading data was obtained from Yahoo! Finance.

For each metric the companies were sorted by their respective metric value from least to greatest, except for dividend yield which was sorted from greatest to least. Each company was assigned an initial point value of zero. A point was then assigned to each of the top six companies for each metric and a point was subtracted from each company in the bottom six for each metric. This means a maximum of 6 points and a minimum of -6 points was possible. The distribution of cumulative points for all six metrics can be seen below in Chart 1 and a complete list of the 22 companies analyzed is available in Table 1.

Chart 1. Cumulative Point Distribution

Table 1. The 22 mining Companies Analyzed

Symbol

Company

(NYSE:AGI)

Alamos Gold Inc.

(NYSE:BBL)

BHP Billiton plc

(NYSE:BHP)

BHP Billiton Limited

(NYSE:CCJ)

Cameco Corporation

(NYSE:CMP)

Compass Minerals International Inc.

(NYSE:FCX)

Freeport-McMoRan Copper & Gold Inc.

(NYSE:FNV)

Franco-Nevada Corporation

(NASDAQ:GOLD)

Randgold Resources Limited

(NASDAQ:GSM)

Globe Specialty Metals, Inc.

(NASDAQ:KALU)

Kaiser Aluminum Corporation

(NYSE:LXFR)

Luxfer Holdings PLC

(NYSE:MTRN)

Materion Corporation

(NYSEMKT:NSU)

Nevsun Resources Ltd.

(NASDAQ:RGLD)

Royal Gold, Inc.

(NYSE:RIO)

Rio Tinto plc

(NYSE:SBGL)

Sibanye Gold Limited

(NYSE:SCCO)

Southern Copper Corp.

(NYSE:SLCA)

U.S. Silica Holdings, Inc.

(NYSE:SLW)

Silver Wheaton Corp.

(NYSE:SSLT)

Sesa Sterlite Limited

(NYSE:TCK)

Teck Resources Limited

(NASDAQ:USLM)

United States Lime & Minerals, Inc.

METRIC 1. PERCENT ABOVE 52-WEEK LOW

Percent above 52-week low values were sorted from least to greatest. The median percent above 52-week low of all companies was approximately 38.9%, while the median percent above 52-week low of the top companies was approximately 19.8%. This implies the companies in Chart 2 have up to approximately 20% upside potential should they converge to the overall median. Additionally, all of the companies in Chart 2 except BHP each currently trades below the midpoint between their respective 52-week high and low.

Chart 2. Top Companies By Percent Above 52-Week Low

METRIC 2. DIVIDEND YIELD

Dividend yield values were sorted from greatest to least. The median dividend yield of all companies was approximately 2%, while the median dividend yield of the top companies was approximately 3.9%. This means the companies in Chart 3 yield approximately two times as much as the median company, which would result in an additional $19,000 in dividends over a ten year period assuming an initial investment of $100,000.

Chart 3. Top Companies By Dividend Yield

METRIC 3. EARNINGS PAYOUT RATIO

Earnings payout ratio values were sorted from least to greatest. The median earnings payout ratio of all companies was approximately 39.3%, while the median earnings payout ratio of the top ten was approximately 17%. While both median earnings payout ratios are considerably low, the companies in Chart 4 could more than double their earnings payout ratio before converging to the overall median which could results in thousands of dollars in additional dividends down the road.

Chart 4. Top Companies By Earnings Payout Ratio

METRIC 4. PRICE TO EARNINGS

Price to earnings values were sorted from least to greatest. The median price to earnings of all companies was approximately 23, while the median price to earnings of the top companies was approximately 12.8. This means the median company is approximately 1.8 times more expensive by price to earnings than the companies in Chart 5.

Chart 5. Top Companies By Price To Earnings

METRIC 5. PRICE TO SALES

Price to sales values were sorted from least to greatest. The median price to sales of all companies was approximately 2.7, while the median price to sales of the top companies was approximately 1. This means the companies in Chart 6 are nearly one-third as expensive by price to sales than the median company.

Chart 6. Top Companies By Price To Sales

METRIC 6. PRICE TO BOOK

Price to book values were sorted from least to greatest. The median price to book of all companies was approximately 2.2, while the median price to book value of the top companies was approximately 1.2. This means the companies in Chart 7 are approximately half as expensive by price to book than the median company.

Chart 7. Top Companies By Price To Book

CONCLUSION

Only 10 of the 22 companies managed to survive this analysis with at least one total cumulative point. The distribution of cumulative points for all six metrics can be seen in Chart 1 above and Table 2 below.

Table 2. Cumulative Point Distribution

Points

Companies

4

3

2

6

1

1

0

3

-1

3

-2

1

-3

1

-4

3

-5

1

The 3 mining companies that cumulatively outranked the other 19 with 4 points are as follows:

  • KALU - Kaiser Aluminum Corporation;
  • LXFR - Luxfer Holdings PLC; and
  • TCK - Teck Resources Limited.

Based on the results covered in this article I will be looking further into an investment in Kaiser Aluminum Corporation.

Comment below if you think KALU is a poor investment choice or there are better mining companies to consider!

Source: 3 Undervalued Mining Companies Revealed