Comparison Of The Top 10 Major Miners

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Includes: AAUKF, AAUKY, BHP, FCX, GLCNF, GLNCY, NGLOY, NILSY, RIO, SHTLF, SOUHY, TECK, VALE, VEDL
by: Joshua Hall

Summary

I compare key aspects of the top 10 major miners.

A large piece of the aggregate earnings of the group come from just two bulk commodities - iron ore and coal.

Investors owning the largest of the group are actually getting very little exposure to base metals.

Excluding Glencore, the group trades at an average current price to previous fiscal year FCF multiple of only 10.9 and has a dividend yield of 3.7%.

Introduction

In this article I am going to compare the following aspects of the top 10 industrial metals miners ("majors"):

  • commodity exposure
  • profitability
  • dividend yield
  • valuation

This will help investors understand what is going to drive the earnings of these Majors, their relative valuation, and their ability to pay dividends going forward.

All the data presented in this post is U.S. dollars and taken from the most recent fiscal years. For most, this was December 31, 2017. For BHP and South 32, this was June 30, 2017. Vedanta Ltd.'s is as of March 31, 2018 (final numbers are estimates).

Top 10 Major Miners

Here's the list of the top 10 major miners, ranked by market capitalization, with the total EBITDA they earned from mining in their most recent fiscal years:

Miner Total EBITDA
(million)
BHP (BHP) $20,298
RIO Tinto (RIO) $19,652
Glencore (OTCPK:GLCNF; OTCPK:GLNCY) $12,485
(does not include marketing)
Vale (VALE) $15,338
Anglo American (OTCQX:AAUKF; OTCPK:AAUKY; OTCQX:NGLOY) $8,823
Freeport McMoran (FCX) $5,347
Teck (TECK) $4,800*
South32 (OTCPK:SOUHY; OTCPK:SHTLF) $2,769
Vedanta Ltd. (VEDL) $3,954
Nornickel (OTCPK:NILSY) $3,995

(EBITDA = Earnings Before Interest Taxes Depreciation & Amortization; *Gross Profit before D&A)

This breakdown is helpful for understanding the size difference of the top 10. As we look at the top commodity exposure for each, the comparative size of various metals markets becomes apparent.

Commodity Exposure

The following table shows the top three areas of commodity exposure for each, based upon EBITDA. Keep in mind that "energy" here generally equals thermal coal.

Miner #1 EBITDA
% of whole
#2 EBITDA
% of whole
#3 EBITDA
% of whole
Top 3
% of Total
EBITDA
BHP Iron Ore 45% Oil & Gas 20% Coal 19% 84%
Rio Tinto Iron Ore 59% Aluminum 17% Energy
&
Minerals
14% 90%
Glencore Copper 35% Energy 29% Zinc 21% 85%
Vale Ferrous
Minerals
(iron)
86% Copper 8% Nickel 6% 100%
Anglo
American
Coal 33% Iron Ore
&
Manganese
27% Copper 17% 76%
Freeport
McMoran
Copper 100% 100%
Teck* Met
Coal
62% Zinc 19% Copper 19% 100%
South32 Aluminum 31% Manganese 24% Met Coal 20% 74%
Vedanta
Ltd.
Zinc 41% Oil & Gas 16% Alum 9% 65%
Nornickel Palladium 26% Nickel 25% Copper 25% 76%

(*Gross Profit before D&A)

A few observations:

  • A large piece of the aggregate earnings of the group come from just two bulk commodities - iron ore and coal. If one is going to "buy the index," they should have a generally positive view on iron ore and steel.
  • The largest miners actually have minimal diversification. Most are very reliant on one commodity.
  • Investors owning the largest of the group are actually getting very little exposure to base metals. (This is more so when you include Glencore's giant trading arm which is barely profitable and greatly reduces the firm's bottom line exposure to copper and zinc.)
  • Copper is the most relevant base metal followed by zinc. Excluding Freeport McMoran, the copper price is not going to move the profit needle very much for most of the members of this group.
  • Investors commonly equate Nornickel with nickel exposure. However, only a quarter of the firm's profits come from its namesake metal.

Profitability, Dividend Yield, & Valuation

The following table shows the EBITDA margin, free cash flow ("FCF") margin, dividend yield, and price to FCF multiple for each major:

Company EBITDA Margin FCF Margin Dividend
Yield
P/FCF
Multiple
BHP 53% 30% 4.1% 11
Rio Tinto 47% 23% 4.5% 10.8
Glencore* 32% 3% 0% 62.1
Vale 45% 25% 3.5% 8.4
Anglo American 31% 17% 4.3% 7.2
Freeport McMoran 33% 20% .5% 10.8
Teck 47% 23% .3% 6.9
South32 35% 20% 1.6% 11.3
Vedanta Ltd. 27% 18% 6.9% 8.4
Nornickel 44% 17% 7.3% 23.5

(*Glencore's EBITDA margin excludes their trading business. Their FCF margin and dividend yield are for the entire business.)

I like to focus on FCF because that's how much cash a company has left over after reinvesting in the business to (1) pay dividends, (2) repurchase shares, (3) pay down debt, or (4) make acquisitions. If strong FCF is not moving a stock in the near term, it eventually will, especially with a strong management team.

Some observations:

  • The five most profitable miners here are BHP, Rio Tinto, Teck, Vale, and Nornickel. For BHP, Rio Tinto, and Vale this is because of their significant exposure to iron ore which is a high margin cash cow right now. Their iron ore segment EBITDA margins are 62% - BHP, 63% - Rio Tinto, and 53% - Vale. For Teck, it is because of their outsized exposure to metallurgical (steelmaking) coal which has been in a strong pricing environment. Their metallurgical coal segment EBITDA is 61%. Investors should expect the collective profitability of the group to have a strong correlation with the steel market since iron ore and coking coal are key steelmaking ingredients.
  • Teck and Nornickel are the most profitable major miners that derive a significant portion (i.e., ~40% or more) of their EBITDA from base metals.
  • The inclusion of its trading business makes Glencore a terrible investment, relative to its peers. Despite rebounding copper and zinc prices, businesses of which account for 56% of its non-trading EBTIDA, it's barely generating free cash flow. No dividends exemplify its failed model. Investors looking for exposure to copper, "battery metals," or zinc should avoid this stock.
  • Excluding Glencore, the group trades at an average current price to previous fiscal year FCF multiple of only 10.9 and has a dividend yield of 3.7%. This low FCF multiple is signaling that these businesses will be able to continue to pay strong dividend yields to investors in the near future since they are priced relatively low to their free cash flow generation.

Final Thoughts

Relative to the broader equity markets, this group is clearly undervalued. Investors should consider the commodity mix of these majors because the underlying performance of each will play an outsized role in driving their future returns.

Important Disclosure

I am an investment adviser and owner of True Vine Investments, a Registered Investment Advisor in the State of Pennsylvania (U.S.A.). I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption.

Any investment advice or recommendations involving securities referenced in this article is general in nature and geared towards a readership of sophisticated investors. This article does not involve an attempt to effect transactions in a specific security nor constitute specific investment advice to any particular individual. It does not take into the account the specific financial situation, investment objectives, or particular needs of any specific person who may read this article. Individual investors are encouraged to independently evaluate specific investments and consult a licensed professional before making any investment decisions.

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