Investing in precious metals is viewed as a safe investment in times of economic contraction. During recessions, investments in gold and silver companies are thought to be a safe haven until economies turn around. Investment in companies that produce base metals and alloys for industrial and commercial use is an investment in the future. Base metals and alloy producers face a myriad of obstacles in maintaining profitability and enhancing shareholder value. Avoiding these obstacles requires a diverse base of portfolio assets spread over a broad geographic area, excellent management, industrial and utility demand.
Vale (VALE) is one of the largest publicly traded metals and mining companies in the world. It is the world's largest producer of iron ore and iron ore pellets. It is the second largest producer of nickel. It also produces industrial and base metals and alloys, thermal and coking coal, platinum group metals and potash. Its products serve the global industrial and food production industries. Headquartered in Brazil, it has operations in the Americas, China, Malaysia, Australia, France, Norway and Oman. It carries on exploration activities in all of those regions including Kazakhstan, Africa and India.
Vale's shares trade around $21. The shares have a 52 week range of $33.74 and $20.46. The price earnings ratio is 6.48 and the earnings per share are $3.31. The dividend yield is 5.30%. The company has total cash of $5.11 billion and total debt of $25.62 billion. The book value per share is $15.17.
The company's first quarter 2012 reports show a decreased profitability and cash flow compared to the same period in 2011. Seasonal factors usually make the first quarter weak in comparison with the rest of the year. Abnormal rainfall, lower prices in iron ore and pellet prices led to narrow operating margins, lower than expected earnings and cash flow. Revenues were negatively impacted and costs increased.
In the first quarter, Vale shipped 104 Metric tons (MT) of iron ore pellets which was an increase of 0.9% in the same period of 2011. It recorded coal shipments of 2.8 Mt which was also a record. Operating revenues were down 16.3% to $11.3 billion from the same period in 2011. Income from operations was down to $3.9 billion from the fourth quarter 2011 to$3.9 billion from $6.0 billion. The company faced a disruption in approximately 300,000 Mt at one of its properties in Brazil as the result of a bridge collapse. The reduction was offset by better than expected performance at other properties.
Operating margin was 34% in the first quarter of 2012 compared to 41.7% in the fourth quarter of 2011. Net earnings in the quarter were $3.8 billion or $0.74 per share, an 18.1% drop from the $4.7 billion in the fourth quarter of 2011.
Capital expenditures in the quarter were $3.7 billion a 34% increase from the first quarter 2011. Vale has settled a tax enforcement proceeding during the quarter for the equivalent of $903 million with the Brazilian federal tax authority. The enforcement relates to taxes on income of non-Brazilian subsidiaries and affiliates from 1996 to 2002. The company commenced a dividend distribution of $3.0 billion on April 30 2012. Vale's debt has and average maturity of 9.4 years and average interest charges of 4.69% per year as of the end of the quarter.
Chinese iron ore imports in the first quarter of 2012 reached an historical high of 187.2 Mt, 5.6% higher than in the first quarter of 2011. Global tightening of the iron ore market will be tempered by growth in China. Vale expects China's demand for nickel will continue to make it the world's largest importer of that metal. Vale will continue to invest in a large portfolio of projects and products in different geographic regions depending on demand.
Cliffs Natural Resources (CLF) trades around $58.50. The 52 week range is $102. To $47.31. Price earnings ratio is 5.31 and earnings per share are $11.01. The dividend yield is 4.30%. The company has total cash of $122.3 million and total debt of $3.99 billion. The book value per share is $43.09. Cliff is a global iron ore and a producer of high and low volatile metallurgical coal. Cliff concentrates on achieving greater scale and diversification in the industry by serving the world's largest and fastest growing steel markets.
Alpha Natural Resources (ANR) is a leading coal supplier in the U.S. It is the second largest in terms of revenues and third largest in terms of coal production. Alpha's shares trade around $13.50 have a year high of $55.20 and a year low of $13.44. The price earnings are negative $3.69. There is no dividend. The company has $558.9 million in cash and $2.97 billion in debt. The book value per share is $33.72.
Alpha's first quarter results showed a first quarter 2012 net loss of $29.1 million or $0.13 per diluted share compared to net income of 449 million and $0.41 per share in the same period of 2011. The result reflected merger related expenses, severance charges arising from the production adjustments and weather related property damage and loss. Alpha focuses on a sustainable thermal coal portfolio and is constantly trying to match thermal coal production with anticipated demand.
BHP Billiton (BHP) has a portfolio of geographically diverse assets of base metals, iron ore and petroleum. It is one of the largest producers of major commodities including aluminum, copper, energy and metallurgical coal, manganese, nickel, silver, titanium minerals, uranium along with oil and gas. It operates in over 100 locations globally. Its strategy is to own and operate large, long-life, low-cost, expandable, upstream assets diversified by commodity, geography and market. The shares trade around $69.30 and have a 52 week range of $97.37 and $62.54. The price earnings ratio is 8.13, the earnings per share are $8.51 and the dividend yield is 3.10%. The company's book value per share is $23.84. It has total cash of $4.36 billion and total debt of $25.07 billion.
Global stainless steel output decreased 2% in the first quarter of 2012 from the first quarter in 2011. The stainless steel industry consumes between 60% and 65% of the world's nickel sales. Consumers and intermediaries ran down inventories in the previous year.
The market pricing for metallurgical coal was at record highs in 2011. Pricing was lower in the first quarter of 2012. The price for premium quality coals has stabilized in conjunction with the rise of Chinese steel production. Extreme weather conditions in Australia which slowed down production also stabilized price. European steel production is below 2011 levels. U.S. coal exports are lower quality blended products which are generally lower priced. The export market of U.S. metallurgical coal is under pressure. The market may strengthen for the rest of 2012 depending on Asian steel production, supply disruptions in Australia, slow recovery in Europe and cutbacks in the production of lower quality U.S. coking coals.
Warmer than normal weather conditions and reduced natural gas prices have reduced the amount of coal burn by domestic utilities. Utility inventories are at record levels. To temper the impact of inventory levels, domestic coal producers have adjusted or idled production at high cost mines. Domestic steam coal demand is weak and is expected to remain so for 2013.
The recent news from Europe and the so-so employment numbers in the U.S. have had a heavy negative impact on shares of industrial metals and minerals companies. Some macro-economic factors from emerging market economies and reconstruction in Thailand and Japan will show some life in economic growth prospects. Thailand is recovering from severe floods. Japan is recovering from the effects of a devastating tsunami in 2011. Global auto and electronics supply chain and industrial production is resuming in Thailand. With fiscal restraint and consolidation and reform plans in flux in Europe we can expect many challenges in the capital markets.
In spite of the crater that is the eurozone worldwide, industrial output increased 6% from 2011. This increase was largely attributable to the U.S., Japan and Asia. Industrial growth is essential to the demand for minerals and metals. Prospects in Japan have improved. Europe will continue to be depressed for the remaining quarters in 2012. Sluggish growth will come from the Europe's major economies of Germany and France. China's economy has seen some weakness in housing starts. Infrastructure investment in China remained moderate in 2011. The slowdown of growth in China is expected to recover after the first quarter of 2012. China has pledged some social housing and infrastructure spending how quickly this progresses remains to be seen.
The companies mentioned here all depend on increased industrial production and infrastructure spending from world economies. There is very little good news for any of these companies right now. All of them are looking to China to provide both a stabilizing influence on pricing and a prospect for growth as an importer.
Brazil is one of Latin America's leading emerging economies. From the early 2000's, worldwide demand for oil, metals and industrial minerals brought the resource and expertise rich country to the forefront of the emerging markets. Growth has been slower since 2009 but fund managers are starting to look toward investment in resource companies from Brazil in a very positive light.
The country and its resource companies are low cost producers with enormous resource holdings. Unfortunately, weak employment data from the U.S. saw Brazilian stocks fall 2% in trading on May 7, 2012. Commodity stocks were hit hard as prices for natural resources sold off. Crude oil futures were impacted by low nonfarm payroll numbers and high inventories. Declines in the job market came about more as a result of the drop in the number of people looking for work as opposed to new jobs being created. Concerns now exist that the U.S. Federal reserve will start a new round of stimulus or quantitative easing.
All of the foregoing were harbingers of doom for Vale's stock and the others mentioned here. All of them are trading at or near year lows. All of these companies struggle to maintain production efficiencies, and properly gauge worldwide demand in light of the macro-factors that impact the shares.
The difference between precious and industrial metals is that pricing is demand based. Precious metals have a perceived value. Industrial metals have a utilitarian value. Without growth, there is very little demand. We now know that Europe's economies will offer no relief to the global economies in 2012. The U.S. has had shown mixed if not pessimistic numbers for the first quarter of 2012.
All of these companies have competent guidance at the management level, which they will need for the foreseeable future. The dependence on China as the continued tempering influence on the crises in more developed economies is beginning to get a bit overplayed. Cliffs' dependence on the consumption of steel by emerging markets makes for little room for improvement in the short term.
Production cuts as well as dividend distributions look like the future for this company. BHP, the largest of the diversified companies is agile enough to exploit its assets to achieve maximum value for its shareholders. Still, it will have a rough ride for the remainder of 2012. Alpha is hemmed in by its coal interests. It is trading well below book value. It may be either the next good ride for capital appreciation or a takeover target by a better capitalized company looking to add to its asset portfolio.
Of all the basement dwellers, Vale is looking like a good option for the brave. It presents a great opportunity to invest in the future of not only Brazil's domestic market, but in the turnaround that will someday come to Europe and North America. The management team, the portfolio of diversified assets and its ability to quickly adjust production to demand all make this a hidden gem in a gritty, grey world.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.