This Global Miner is Down 51%, BUY or Pass it By?

Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Over the past few weeks I've written some positive articles on global diversified miners -- namely BHP (NYSE: BHP), Vale (NYSE: VALE), Rio Tinto (NYSE: RIO) and Anglo American (LSE: AAL). A smaller but still global diversified miner of iron ore and ferrochrome is ENRC (LSE: ENRC).

ENRC reported largely in-line 1h 2012 earnings last week. However there were some red flags. Net debt was up more than expected to $3.4 billion and is forecast to move higher in each of 2013 and 2014. Like peers, ENRC is reviewing its capital expenditure plans in light of difficult market conditions. To be safe, ENRC announced a dividend cut of 60%.

Below is data compiled from recent DB reports. ENRC is at the low end of valuation on an EV/EBITDA basis at 4.2x. However, ENRC has by far the highest Net Debt to EBITDA ratio at 1.7x. Even worse, ENRC is the only miner with Net Debt forecast to increase in 2014 vs. 2013. With regard to EBITDA margin, ENRC holds its own, with Rio Tinto and Vale as standouts. Finally, it is worth noting that ENRC's expected Cash Flow from Operations (CFO) as a percentage of its EV trails Rio, Vale and Anglo by a considerable amount. All in all, ENRC is not as strong as peers, but not an obvious laggard either.

          EV / Net Net Debt /    
  EBITDA Sales Margin    EV EBITDA Debt EBITDA CFO CFO/EV
ENRC 3,084 7,663 40.2% 13,031   4.2X 5,353 1.7X 1,843 14.1%
RIO 25,364 57,186 44.4% 104,211   4.1X 13,417 0.5X 18,487 17.7%
VALE 26,459 58,662 45.1% 120,685   4.6X 31,941 1.2X 22,529 18.7%
ANGLO 11,931 40,483 29.5% 49,328   4.1X 12,303 1.0X 9,305 18.9%
BHP 33,345 75,761 44.0% 210,221    6.3X 25,411 0.8X 23,672 11.3%

Where ENRC does suffer by comparison is financial flexibility. ENRC has the highest debt leverage and already has the lowest dividend yield at about 2%. Peers have an average yield of about 4% (Vale at 6.4%). If commodity prices do not improve, ENRC will be forced to cut cap-ex sooner and deeper, stunting its growth profile. ENRC's largest segment is iron ore, but its scale pales nex to Rio, Vale and BHP. And ENRC's segment EBITDA margin in iron ore is well below that of the BIG 3's.

ENRC has been plagued for years with concerns of poor corporate governance. To this day, shareholders are unhappy. That's why the Board is considering a "de-merger" of its international assets to maximize shareholder value. Is this the silver bullet, a catalyst, a reason to invest? Sadly no. ENRC is a complex and controversial enterprise. Carving it up would be a very challenging endeavor even in good times. Who knows how this will play out? Is it worth the risk to find out? No. If global miners rebound smartly in coming months, there's a good chance that ENRC will significantly under-perform.

Foolish investors should be careful of bottom fishing in a sector that's under severe pressure. Sometimes stocks are off 51% for a reason. A more prudent and compelling course of action is to buy Rio Tinto for its world class iron ore business. Rio is growing its iron ore production to 353 million metric tonnes over the next 3-5 years.  And next year the company's massive copper and gold project in Mongolia will see first production.

Or consider Vale. Vale's EBITDA margin of 45% is tough to beat. Even tougher to beat is its 6.4% dividend yield. As the world's single largest iron ore producer with industry-low cash costs, Vale is producing tremendous amounts of CFO. Vale has spent the most of its peers on capital expenditures over the past 3 years, meaning its growth pipeline is second to none.

BHP has the largest and best premium low-vol coking coal franchise in the world. Based in Queensland, Australia, and teamed with a Japanese trading outfit, BHP controls almost 20% of the seaborne premium hard coking coal market. As large as BHP is in coking coal, it's even larger in iron ore and oil & gas. BHP is by far the largest mining company in the world. With a safe 3%+ dividend yield, I'm on record as saying that BHP has a comfortable 20% upside and 5% downside. To be conservative, one could wait for a pullback in BHP shares to $62.50.

Anglo screens fairly cheap, but its EBITDA margin is not as high as peers. Anglo has a strong thermal coal business that's currently under significant pressure and a solid copper business that Xstrata wanted to acquire back in 2009. Anglo could be a dark horse take out candidate.

Stick with the winners, the safer plays with equal or better upside than ENRC. I strongly believe that Vale, Anglo and Rio have upside of 40% or more over the next 12-18 months.


MockingJay2011 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.

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