What follows is a list of basic material companies with attractive upside and risk/reward. These firms are heavily discounted due to investor reservations about high volatility following the recession. These miners are engaged in a variety of different industries: gold, silver, zinc, and iron ore, to name a few. Ultimately, I believe they are safer than what the market acknowledges for several reasons. Emerging market exposure, attractive diversification, and greater production all increase upside beyond the pure basic material play. Accordingly, I recommend an investment in all three of these firms.
Newmont Mining (NEM)
Newmont trades at a respective 42.2x and 8.1x past and forward earnings with a dividend yield of 3.1%. Consensus estimates for Newmont's EPS forecast that it will grow by 8% to $4.74 in 2012, grow by 16.5% in 2013, and then fall by 6.9% in 2014. Assuming a multiple of 12x and a conservative 2013 EPS of $5.45, the stock would $65.40.
This miner has 70% less volatility than the broader market and still offers favorable upside. Based on the current price of gold and copper less mining costs, taxes, and basic expenses, one analyst even argues that the company should be worth about $94 per share. Newmont also began 2012 with a bang, growing revenue 9% y-o-y while meaningfully improving the balance sheet. $2.5B worth of senior debt creation enabled the company to repay past borrowing and replenish growth capita. With the Akyem and Conga projects advancing, Newmont has a variety of catalysts to grow free cash flow.
Vale trades at a respective 5.5x and 5.7x past and forward earnings with a dividend yield of 2.8%. Consensus estimates for Vale's EPS forecast that it will decline by 17% to $3.62 in 2012, and then by 0.8% and 5% more in the following two years. Assuming a multiple of 9x and a conservative 2013 EPS of 8x and a conservative 2013 EPS of $3.53, the stock would hit $28.24.
This company is led by top management and is mostly leveraged to emerging markets, which offers significant growth potential. Vale retained attractive share during the European recession. As prices in iron ore are likely to normalize in the near future, Vale will become a safer investment and thus attract back risk-averse investors. From diversification to solid capital structure, Vale, however, is already less risky than what the market acknowledges.
Hecla Mining (HL)
Hecla trades at a respective 8x and 7.6x past and forward earnings with a dividend yield of 1.2%. To value this silver producer, I employ a DCF model. In this model, I make several assumptions: (1) 5% per annum growth over the next 6 years, (2) operating metrics stay roughly in-line with historical levels, (3) a 2.5% perpetual growth rate, and (4) a discount rate of 10%. The result indicates a fair value figure of $4.92, implying around 20%.
Investors are nevertheless factoring in an overly high discount rate. Part of the fear stems from the company's high beta of 2.1. The other part of the fear stems from the thought that basic materials have reached their peak from the recession. No matter, Hecla has been on a role in terms of operational performance. The firm ended 2011 in an excellent financial position with records set in revenues and gross profit.
Disclaimer: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.