In this article I am going to compare the following aspects of the top 10 industrial metals miners ("majors"):
- commodity exposure
- dividend yield
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 |
|RIO Tinto (RIO)||$19,652|
|Glencore (OTCPK:GLCNF; OTCPK:GLNCY)||$12,485 |
(does not include marketing)
|Anglo American (OTCQX:AAUKF; OTCPK:AAUKY; OTCQX:NGLOY)||$8,823|
|Freeport McMoran (FCX)||$5,347|
|South32 (OTCPK:SOUHY; OTCPK:SHTLF)||$2,769|
|Vedanta Ltd. (VEDL)||$3,954|
(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.
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.
% of whole
% of whole
% of whole
|Top 3 |
% of Total
|BHP||Iron Ore||45%||Oil & Gas||20%||Coal||19%||84%|
|Rio Tinto||Iron Ore||59%||Aluminum||17%||Energy |
| Anglo |
|Coal||33%||Iron Ore |
| Freeport |
| Vedanta |
|Zinc||41%||Oil & Gas||16%||Alum||9%||65%|
(*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 |
(*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.
- 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.
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.
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.
All data presented by the author is regarded as factual, however, its accuracy is not guaranteed. Investors are encouraged to conduct their own comprehensive analysis.
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I hope you found this article on the top 10 Majors insightful. It is an excerpt from a post I recently wrote for subscribers of my Seeking Alpha Marketplace service Industrial Minefinder™. I use fundamental analysis on industrial metals to help determine when and how much to buy of what I think are the best opportunities in the related mining sector.
If you are interested in subscribing to Industrial Minefinder™, you can sample my work by reading my "author's picks" accessible from my Seeking Alpha profile. Do not hesitate to direct message me with any questions you may have.
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