The recent pullback of the market has created some value opportunities. Out of all the healthy sectors in the global economy, the leading mining companies are some of the best bargains on the market. With P/E ratios all under 12, and earnings growth remaining high, the stocks are trading cheaply. Some concerns with the miners have been the expected falls in commodity prices due to a slower economy in the United States and inflation in emerging markets. However, with the current low interest monetary policies of the Fed and other major central banks, expect the inflationary pressure to continue to boost commodity prices. Demand will still be present from the growing needs of emerging markets. With ROICs all over 20%, these three companies have proven management that has capitalized the most on the current commodity super cycle. As a result, these companies' current earnings growth will either hold constant or raise even higher, making the following stocks an excellent buying opportunity.
BHP Billiton (BHP) - BHP is the world's leading mining and natural resources company. Out of these three listed mining companies, BHP is the most diversified with operations in oil, steel production, iron ore, coal, diamonds, and a variety of industrial metals. Higher commodity prices and increased production will keep earnings growth to at least analysts' targets of 11% and probably higher. In addition to current operations, BHP has room to grow from its entry into the potash market, natural gas production and through future potential acquisitions.
BHP is trading at a value with a forward P/E ratio of 11.91 and a PEG ratio of only one. On a discounted cash flow basis, the company's intrinsic value is $110 versus around $92 per share, where its currently trading. The company is also run incredibly efficiently with a 22.7% return of investment capital. Ancillary factors favoring BHP are that it pays a solid 2% dividend and the growing strength of the Australian dollar against the U.S. dollar.
Freeport McMoRan Copper and Gold (FCX) - Copper is the main component of electrical wiring and its price is a key leading indicator for growth. Freeport McMoRan is the world's largest copper producer. It should benefit from both the growth of private construction in emerging economies and the construction of new infrastructure in the developed world. However, their revenue streams are not as diversified as competitors, as 82% of its mining revenues come from copper.
The valuations that Freeport currently has makes BHP look expensive. It may not be growing as fast as BHP or Vale, but it still has a P/E of 9.7 and a forward P/E of 8. On a discounted cash flow basis, the company has an intrinsic value of $65.51 per share, and generates 27.49% ROIC. For such a capital intensive business, FCX has a low long term debt/equity ratio of 0.26, so solvency is nowhere near being an issue. Like BHP, it also pays a 2% dividend yield.
Vale (VALE) - Vale is the world's second largest miner and one of Brazil's largest companies. They mine mainly iron and nickel, but also have a presence in the potash, manganese and aluminum markets. With nearly a 16% earnings growth rate, VALE is the fastest growing company of the three and has expanded mining operations out of Brazil into many other countries such as Canada, Indonesia, and the United Kingdom.
With an intrinsic discounted cash flow value of $62.13 (after factoring a higher discount rate for Brazilian stocks), Vale has the greatest differential from its current price of $31.40 to the present value of its earnings. Vale has a strong ROIC of 20.6% and trades with an absurdly low PEG ratio of 0.47. VALE pays a 1.89% dividend yield.
My one concern with Vale is the degree of involvement that the Brazilian government has with the company. The government created a forced firing of the company's CEO after Vale supposedly "did not invest enough of the revenues back into the country" and may use VALE as a vehicle to finance social programs or infrastructure projects unrelated to the company's operations. This is probably why the stock trades at such a discount. Due to these political risks, I would not recommend buying this stock. However, if government intervention is limited, Vale will be a strong performer.
Overall, these mining stocks are trading cheaply in spite of continued growth in their underlying commodities and fundamentally strong financials. It may be one thing if management was dubious, but all three of these companies are well run. I would recommend buying BHP and FCX, but would stay away from VALE until its political risk clears up.