3 Mining Stocks to Consider Buying
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If you are unsure about which way the economy will move, basic materials may carry a significant degree of risk. They can swing one way or the other seemingly out of nowhere. On the other hand, they are often a good hedge against macro uncertainty. Below, I explain my views on which stocks will outperform and why.
Hecla Mining (NYSE: HL): The Bull's Case for Silver
Despite operational problems at Lucky Friday (note, however, that the fix-up has proceeded smoothly), Hecla has seen strong production elsewhere. The Alaskan Greens Creek mine generated $26 per ounce of margin in the most recent quarter as capital expenditures begin to pay dividends. While the mine generated 100,000 fewer ounces in 2Q12 compared to the preceding quarter, strong ground control has positioned the mine for in excess of 6 million ounces of silver this year.
More than $200 million is on the balance sheet with little debt, which will enable the company to continue to make investments in its projects. Management is so optimistic about the trajectory that they are on track to boost silver production by 50% from 2012 to 2016. At the same time, Lucky Friday is seeing penetration into deeper and higher grade material.
It is still fairly expensive at a respective 21.7x and 13.6x past and forward earnings. Analysts forecast under 5% annual growth over the next five years, but I believe this is overly negative. Yes, the firm has declined during the last half decade, the quick ratio stands at 3.5x. This grants the silver miner a war chest to pursue takeover activity, expand scale, and thereby grow margins. Greater geographical exposure will also help mitigate perceived risks, like those concerning the restart of Lucky Friday.
If silver is not your thing, gold and copper ought to be. Freeport, for example, is selling at a bargain price of 12.4x past earnings. Analysts currently rate the stock a "buy," and it is relatively safe with a dividend yield of 3% and solid growth opportunities. I am particularly bullish on copper prices given my belief that the worst has been factored in from macro uncertainty.
As one of the biggest global mining companies, Freeport is safer against political risks than many investors give it credit for. After the Indonesian strike, the popular wisdom is that management will just have to make concessions from time to time. In reality, however, management can just allocate cash in different mines to navigate labor disruptions. Moreover, it should also be noted that Freeport has the cheapest operations in copper in the world. Although FX headwinds will dilute earnings power, the bears have overblown risks stemming from China. In the long-term, Asia will see ever-higher demand for basic materials.
With that said, Freeport has been admittedly on and off. Southern has also had two misses (average miss of 2.2%) in the last four quarters. It now trades at a respective 13.2x and 14.7x past and forward earnings with a dividend yield of 4.5%. With a forecast for 10.1% annual EPS growth over the next five years, Southern makes for solid risk/reward if you are on skeptical about Freeport.
Should Southern merely meet expectations, it will generate 2016 EPS of $3.40. At a 15x multiple, this translates to a future stock value of $54.40. Discounting backwards by 10% yields a present value roughly in-line with the current market assessment. Adding in the 4.5% dividend yield, double-digit return metrics, and a quick ratio of 3.2x, however, gives you a relatively safe stock.
TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold and Hecla Mining Company. 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.