*All data are as of the close of Friday, December 5, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
The largest Industrial Metals & Minerals companies are conglomerates with numerous subsidiaries operating in multiple regions of the world where mining is most active, including Australia, Mongolia, Africa, South America, Mexico, and Canada. Today's focus will be on the three largest Canadian companies in the industry since there are no larger U.S. companies in the space.
• Teck Resources Limited (NYSE: TCK), headquartered in Vancouver, British Columbia, mines such metals and minerals as copper, copper concentrates, cathode copper, steelmaking coal, refined zinc and zinc concentrates, lead, molybdenum, germanium, indium, cadmium, gold, silver, industrial chemicals, fertilizers and sulfur products in the Americas, Asia Pacific, Europe, and Africa. It owns or has interests in 13 mines in Canada, the United States, Chile, and Peru; holds interests in oil sands projects in the Athabasca region of Alberta; operates a metallurgical complex; and produces electrical power.
• Cameco Corporation (NYSE: CCJ), headquartered in Saskatoon, Saskatchewan, is engaged in the exploration, mining, milling, purchase, and sale of uranium concentrate. Its uranium mines include the McArthur River, Key Lake, and Rabbit Lake properties in Saskatchewan; the Crow Butte property in Nebraska; the Smith Ranch-Highland property in Wyoming; and the Inkai property in Kazakhstan. It also engages in the refining, conversion, and fabrication of uranium concentrate, uranium trioxide, uranium hexafluoride, and uranium dioxide. Additionally, it manufactures and sells fuel bundles, reactor components, and monitoring equipment to CANDU reactors, and has interests in Bruce Power Limited Partnership which generates and sells electricity from four nuclear reactors in southern Ontario, Canada.
• Turquoise Hill Resources Ltd. (NYSE: TRQ), headquartered in Vancouver, British Columbia and subsidiary of Rio Tinto plc (NYSE:RIO), produces copper, gold, silver, coal, and molybdenum principally in the South Gobi desert of Mongolia.
Though the Industrial Metals & Minerals industry belongs to the Basic Materials sector, not all industries within the space have performed equally well. While the oil and gas industries have been hurting lately, they certainly have not been hurting as much as the metals and minerals producers, as graphed below.
Since reaching their peak in February of 2011 until today, where the broader market S&P 500 Index [black] has gained 59% and the SPDR Basic Materials Sector ETF (NYSE: XLB) [blue] has gained 26%, Teck [beige] has lost 77%, Cameco [purple] has lost 60%, and Turquoise [orange] has lost 86%.
On an annualized basis, where the S&P has averaged +15.39% and XLB has averaged +6.78%, Cameco has averaged -15.65%, Teck has averaged -20.09% while Turquoise has averaged -22.43% per year!
But looking forward the Industrial Metals & Minerals industry as a whole may finally be set to come out of its bear market, as tabled below where green indicates outperformance while yellow denotes underperformance.
While still digging a deeper hole for itself in the current quarter with substantial earnings shrinkage, the industry is expected to reclaim about half that shrinkage next quarter.
2015 looks even more promising as the industry is expected to beat the broader market's earnings growth at some 14.04 times its rate before slowing to a more sustainable but still robust 2.25 times annually over the next five years.
Zooming in a little closer, the three largest Canadian companies in the industry are expected to beat their peers near term while lagging behind longer term as tabled below.
Where the industry is expected to shrink in earnings this quarter, our three companies are set to follow, though not sinking as far into the hole. They then continue to outperform both their industry and the broader market next quarter with substantial earnings growth ranging from 2.21 to 11.61 times the S&P's average rate.
While their growth is seen continuing strong in 2015, beating the broader market at some 1.17 to 8.41 times its rate, they still fall short of their industry's growth, their lag continuing over the next five years.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
Since several growth figures are not available, neither metric will factor into the comparison, though it is worthy to note that the figures which are available are all negative, indicating shrinkage, not growth.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes, and depreciation.
Of our three contestants, Cameco operated with the widest profit margin, Teck enjoyed the widest operating margin while Turquoise contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control and from the equity invested into the company by shareholders.
For their managerial performance, Cameco's management team dug up the greatest returns on assets, Teck's team carved out the greatest returns on equity while Turquoise's team lost both assets and equity.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Teck provides common stockholders with the greatest diluted earnings per share gain as a percentage of its current share price while Turquoise's DEPS over current stock price is the lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value comes under scrutiny, as well as the stock price relative to earnings growth known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers and might thus be a bargain.
Among our three combatants, Teck's stock is the cheapest relative to forward earnings and company book value while Cameco and Turquoise split the highest valuations between them.
Since Turquoise's price to 5-year PEG ratio is not available, the metric will not factor into the comparison.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Teck offers the highest percentages of earnings over current stock price for all times periods. At the low end of the scale, Turquoise offers the lowest percentages overall.
• Earnings Growth: For long-term investors, this metric is one of the most important to consider as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Cameco offers the greatest earnings growth this quarter, even if it is shrinkage, while Turquoise offers the greatest growth going forward.
Since Turquoise's 5-year growth estimate is not available, the metric will not factor into the comparison.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean, and low price targets over the coming 12 months, analysts believe Turquoise's stock offers the greatest upside potential and least downside risk while Cameco's stock offers the least upside and Teck's offers the greatest downside.
It must be noted, however, that all three stocks are already trading below their low targets. While this may mean increased potential for sharp moves upward, it may warrant reassessments of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up is analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories and would only be negating those winners of their duly earned titles.
Of our three contenders, Turquoise is best recommended with 0 strong buys and 2 buys, representing a combined 100% of its 2 analysts, followed by Teck with 3 strong buy and 6 buy ratings, representing 39.13% of its 23 analysts, and lastly by Cameco with 2 strong buy and 3 buy recommendations, representing 38.46% of its 13 analysts.
It is important to note here that most analysts are still very wary of this industry with Turquoise's seemingly strong analyst support being skewed by having very few voters.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below, you will find all of the data considered above, plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Teck with a gaping victory, outperforming in 13 metrics and underperforming in 4 for a net score of +9, followed far behind by Cameco, outperforming in 6 metrics and underperforming in 6 for a net score of 0, with Turquoise deep underground, outperforming in 8 metrics and underperforming in 17 for a net score of -9.
Where the Industrial Metals & Minerals industry is expected to underperform the S&P broader market substantially this quarter, outperform significantly next quarter, substantially in 2015, and significantly beyond, the three largest Canadian companies in the space are expected to more or less mimic the same prospects with slightly better growth near term and slightly worse longer term.
Yet after taking all company fundamentals into account, Teck Resources Limited scrapes together the shinier financials given its lowest stock price to forward earnings and company book, highest cash and revenue over market cap, highest operating margin, highest return on equity, highest EBITDA over market cap, highest diluted earnings over current stock price, highest future earnings over current stock price in all periods, and highest dividend - decisively winning the Industrial Metals & Minerals industry competition.