By Nicholas Southwick Levis
While Iron Ore prices are a much debated hot button issue for investors, I expect the price of almost every commodity out there to rise over the long term, even iron ore, with all of the capacity related issues the industry faces.
While The following stocks are primarily supplying steel companies and are economically sensitive, these names are cheap enough for investors to hold onto even with the economic headwinds they face. As for gold and silver mining, we expect the stocks with the highest reserves/market cap ratios to outperform, and we are especially bullish on mining stocks that have large reserves and positive free cash flows.
Vale (NYSE:VALE) - At 5.8X earnings, Vale is a value here in my opinion, and the stock is simply too cheap to ignore. Given the constant erosion of paper wealth over time, investors should consider mining stocks like VALE, which benefit from rising commodity and metals prices. Vale's 4.6% forward dividend yield is compelling right now, and the stock has lagged the market over the past year, with the name down some 25% from July of 2011. Many investors are worried about a slowdown in the Chinese economy, which would hurt demand for Vale, but we think these fears are overblown and that rising commodity prices are enough to compensate for China's vast abandoned cities and overbuilt property markets. Some of these concerns are worrisome, and the demand side of the VALE and RIO situation should be watched closely.
Rio Tinto (NYSE:RIO) - Rio Tinto is a huge company. It is a company too big to actively manipulate by upper management, which makes this visible company a well-oiled profit machine; one of the best things about mega cap stocks like Rio Tinto is that poor managerial decisions will be met with scorn and consequences from board members and shareholder activists. Small caps usually operate under the radar and are under the complete control of one person, often a shyster. While many people are looking to gold and to TIPS, most investors have ignored mining stocks as protection against rampant inflation. Why look for the most speculative gold miner with years of large net operating losses, when a RIO is trading for under 7X forward earnings? Look, it's hard to get your hands around a stock like this, which has disappointed shareholders over the short term as far as meeting earnings expectations. However, RIO's future is bright enough that we can look past the mistakes made in recent quarters. A 6.4X forward earnings multiple is just too attractive, when combined with a 3.4% dividend yield, to pass up. A covered call approach is preferable right now in my view, as the overall stock market looks ready to move lower in the short term, since the S&P, Russell 2000 and Nasdaq 100 are faced with pretty severely overbought charts.
Newmont Mining (NYSE:NEM) - Newmont Mining is another big name in mining which is well-managed and well-positioned for the future. Newmont has one of the best market cap to probable reserve ratios in the gold mining sector, while the company is highly profitable, something Newmont's competition lacks entirely. While many of the juniors could end up being good speculations, NEM is a preferable investment in my view. Though Warren Buffett recently came out swinging against investing in gold, shrewd investors must also examine the actions of global central bankers to evaluate the risks and rewards of investing in paper money versus hard assets. Sure, we pay for things with paper now, but in the future that may change. Protecting your money with gold and gold miners has historically been one of the only financial checks against FIAT currency risks. In Weimar Germany, Soviet Russia, Zimbabwe, Argentina, Iceland, Rome, etc… gold was always the best hedge against political troubles, and no FIAT currency has ever lasted more than 100 years throughout history. Now don't get me wrong, I think Buffett is right that stocks are good investments and that cash is a poor long-term investment. That's why I think Newmont is a solid long term investment for investors looking to hedge their currency risk while staying invested in stocks.