By Jared Cummans
Commodity investments come in all shapes in sizes. While futures are arguably the most popular way to obtain exposure to your favorite commodity, there are numerous other options out there. There are a number of exchange traded products that offer exposure to futures, as well as physical commodities like the SPDR Gold Trust (GLD), which invests in physical gold bullion. Finally, there are commodity stocks, which generally consist of mining and exploration companies like BHP Billiton (BHP). This latter option may be particularly attractive to investors seeking high yields, but still want to reap the benefits of commodity exposure in their portfolio.
Like any other company that sells a physical product, the profitability of mining firms depends on the current market price for the goods that it sells. Because a certain portion of mining companies’ cost structure is fixed, higher prices for the commodities they extract and sell translate into higher profit margins, and declining prices translate into diminished profitability. As such, mining ETFs often trade as a leveraged play on spot prices, exhibiting increased sensitivity to commodity markets. Another thing to note is that a mining company’s performance may not always coincide with the commodities it tracks. A great example is that GLD has gained 25.4% on the year, while GDX, a popular Gold Miners ETF, has lost nearly 2%.
For those investors who understand the ins and outs of mining stocks, these securities can be big boosts to a portfolio, as some of these firms offer robust yields. A constant dividend stream for a portfolio can add a significant amount of value beyond steady income. Dividends help investors hedge against inflation as well as bear markets, a timely investment as many feel that the U.S. is on the verge of slipping into another dismal bear period. Dividends are usually good barometers for the health of a company; while aggressive accounting can cover business deterioration, a direct cash payment to all investors suggests that business is going quite well.
Below, we analyze three high-yielding mining companies to help investors sort through which may be a good fit for their portfolio:
Alliance Resource Partners (ARLP) – Dividend Yield of 5.2%
Alliance is a publicly traded master limited partnership that produces and markets coal across in the US. Though it does not always get the recognition that it deserves, coal is still a vital fossil fuel for energy production in both the U.S. and all across the world. In fact, coal accounts for approximately 45% of the nation’s total energy usage, and estimated reserves could supply our country with 245 more years of steady coal consumption. The company operates in the Midwestern and Eastern states and produces a diverse range of coal with different sulfur makeups as per specifications of certain customers.
As for the stock itself, ARLP has a market cap of approximately $2.7 billion with an average daily volume of over 110,000. A glance at the key statistics reveals a P/E of 9.89 with solid quarterly growth statistics, pointing towards strong future for the company. The stock has a current payout ratio of just 46%, relatively low by MLP standards, suggesting that while this may not be the highest yielding option available, it may be poised for growth in coming years without falling prey to paying out all of its gains to its investors.
Rhino Resource Partners (RNO) – Dividend Yield of 8.4%
Rhino is another coal producer that prides itself on maintaining safe operations while respecting the environment as much as a mining company can be expected to; the latter half is a sticking point that many mining firms are accused of not doing enough. As of early 2010, the company controlled an estimated 285 million tons of proven reserves with another 122 million of non-reserve coal deposits. The company also has significant proven and probable reserves of premium metallurgical coal. Though Rhino has many similar mining locations as the Midwest-focused Alliance, this company also has operations in Western states.
RNO is a small cap firm, with just $535 million in market cap and an average daily volume of around 73,000. The stock has a rather high P/E of 78.52 combined with a current EPS of $0.28. But for those concerned with the price to earnings statistic, Rhino’s strong quarterly growth of both revenues and profits may alleviate investor anxiety. Investors should also take note of RNO’s quarterly reports, the previous three of which have missed their marks, which may be a cause for concern as to its long term outlook. For the time being, the company has a large number of shares held by insiders, over 33%, another possible deal-breaker for investors. Finally, consider that this high dividend yield is met with just a 22% payout ratio, allowing for a solid yield without abandoning too much cash.
Southern Copper Corporation (SCCO) – Dividend Yield of 8.1%
Southern Copper is a subsidiary of a mining company that was founded in 1952, but was formed in a 2005 acquisition of Minera Mexico by Southern Peru Copper Corporation. The company is the world’s largest public copper miner and also ranks among the largest producers of molybdenum, silver, and zinc. Southern Copper is headquartered in Phoenix and is traded on both the New York Stock Exchange as well as the Lima Stock Exchange.
This firm has a well established stock, sporting a market cap of $26.5 billion and an average daily volume of nearly 3.5 million. With a P/E of 13.27 and a 53.5% quarterly revenue growth (yoy), Southern Copper looks to be in a strong position to grow. Investors should note that the company has about $2.75 billion in debt with just $1.7 billion in cash which could lead to some liquidity issues in the worst case scenario. Another surprising statistic is who holds this company’s stock; 80% of outstanding shares are held by insiders and 14.1% are held by institutions, leaving somewhere around 6% for your average investor to trade. SCCO will be somewhat of a volatile holding, as it has a beta of 1.6, but its dividend yield of 8.1% makes it hard to pass up.
Disclosure: No positions at time of writing.