Possible Low in Mining Stocks and Further Valuation
The fed rate hikes are starting to work with some major economic indicators beginning to drop. Also, the stock market volatility increased substantially during this last rate hike, these could be signs that the Fed has reached (or is close) its limit on rate hikes. We could see a nice pop in stock prices if the fed starts to pause. Its hard to predict, but these are some interesting observations non the less.
The rate hikes have brought lower prices in the mining stocks and we have taken advantage by being a net purchaser. We base our investment decisions on valuation, competitive position and end market outlook. Lets review.
BHP:
BHP is best in class when it comes to ROTA and operational excellence. Its the best operationally, which is seen by comparing return on total assets (ROTA) to RIO and Freeport-McMoRan.
$14.8B 5 year Average NFCF. Total assets is $95.2B. 15.5% ROTA. $10.5B 10 year average NFCF. 11% ROTA. And this is done with only $12B in long term debt (LTD), which is basically no debt with a company this size. Current Market cap is $129B. So we are looking at 8.7 PE (11.5% yield) for the 5 year average and 12.3 PE (8.1% yield) for the 10 year average.
RIO:
Valuation for Rio is also cheap and they have great to good quality assets. But the ROTA is below BHP.
$10.8B 5 year average NFCF. Total assets of $103B. 10.5% ROTA. $6.5B 10 year average NFCF. 6.3% ROTA. And again this is done with only $12.7B in LTD, which is almost negligible with a company this size. Current Market cap is $91.3B. Giving us a 8.5 PE (11.8% yield) for the 5 years average and 14 PE (7.1% yield) for the 10 year average.
FCX:
Freeport-McMoRan is the largest publicly traded Copper Producer in the world with some of the biggest and best copper assets. The Free Cash Flows and ROTA are not as attractive but we still like them for the pure play exposure to our energy transition thesis.
$2.5B 5 years average NFCF. Total assets of $48B. 5.2% ROTA. $1B 10 year average NFCF. 2% ROTA. $9B total LTD is a little high compared to historical cash flows, but the company is focused on keeping debt levels low, which is showed by the steady decrease since 2015 ($19.7B LTD). Current Market Cap is $40.5B. 16.2 PE (6.2% yield) for the 5 years average and 40.5 PE (2.5% yield) for the 10 year average.
Conclusion
Valuation - Comparing the above yields to the long term US government bond yields of below 4%, these companies are extremely attractive.
Durable Competitive Advantage - All the above companies have large advantages when it comes to cost, sustainably, diversification, reserves and technology.
Outlook - We have discussed the outlook for base metal producers in length during past blog post. The thesis is still in place and looking even better than thought. Almost every car company is investing in battery manufacturing in a big way. There is just not enough base metals to satisfy this demand. Especially copper, since large high quality reserves are very hard to find and even harder to develop. The Resolution Mine in Arizona is a good example. Resolution has the largest copper reserves in America and would satisfy 25% of Americas annual copper needs, but its on hold because of Native American traditions that are held in the area.
RIO and BHP are not pure play base metal companies but we have looked into and discussed on our blog the outlook for Iron Ore and we still like these companies based on good valuations and best in class copper assets. There is a possibility that Rio and BHP get revalued higher if they can sustain cash flows.
Although FCX is the most expensive valuation wise, OWI has decided to take a position since this gives us a pureplay way to invest in our energy transition thesis. We believe the amount of copper needed in the next decade will not meet demand. And we are predicting that a NFCF north of $5B will be the norm for this company. So although this is more speculative than our BHP and RIO trades, we believe its an intelligent speculation.
