3 Metals That Are Not Gold and Their Miners

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

Metals might be a good commodity to invest in sometimes, but not all metals are created equally and not all are in ascendance all the time. Investing in businesses that extract, refine, and prepare the metals presents a different way to enjoy the benefits of price increases for the metal. Businesses have the benefit of charging more than it costs to extract the metal, especially if they process it into a form that is easier to transport and use. It also gives them the ability to reduce expenses to increase profitability and keep pace with price drops. Investing in the mining companies helps temper the cyclical nature of the commodities market.

1. Palladium Miners Seek Rare Metal

Stillwater Mining (NYSE: SWC) is the only palladium and platinum producer in the United States. It is also one of the largest producers in the world. There is a companion article to this one that goes over the metals in detail, but palladium is used in catalytic converters for cars. The demand is so great that the price of palladium is dictated heavily by the number of cars manufactured.

In early 2011, palladium was much higher than it is now. Using the ETF PALL as a proxy it touched $85 versus $70 right now. SWC was above $20, which is more than the $15 it sits at right now. Wells Fargo recently initiated coverage with an outperform, and that is only natural considering the market's overall outlook on palladium. A company like Stillwater will benefit as palladium demand increases.

The company is expanding production, but its present production is also in line with its estimates. That is a good sign because it means the decisions the company has been making have yielded the expected results. The company has a solid cash position, but earnings are on the decline. That might explain why the stock has not benefited with the positive sentiment about palladium yet. Stillwater will probably head above $25 as palladium rises, as long as the company does not make any serious missteps.

2. Aluminum Demand Growing Slowly

Alcoa (NYSE: AA) is as stagnant as ever, but the long-term outlook is still good. Alcoa is a huge producer of aluminum, and aluminum is the most used non-ferrous metal on the planet. It is also one of the most abundant, but during times of peak economic output Alcoa can deliver some serious returns. Aluminum has many demand drivers so no one thing drives the price like palladium. Aluminum is used in automobiles as well, but the increase in that demand is not going to affect the entire market. Global economic growth is the critical catalyst for Alcoa. The company is making lemonade out of lemons by cutting costs and gaining some savings from scale by expanding production.

The Alcoa earnings call had some guidance for demand growth. The numbers sound conservative, which is why I am inclined to trust them. The company does not want to over promise, and I think the goal should be to present as negative an approach as possible while still being positive overall. No aiming for the stars to hit the moon. You aim for Everest and pray for the moon. China is the main driver of growth at 11%. Other growing economies will lead to positive surprises but there are not any specifics given for countries like India. North America is a respectable 4%, but Europe is at -1%. If European demand growth can flip positive and start recovering it would be a good sign for the company and the world economy. Overall the demand for 2013 is estimated to be 7%, which is higher than 2012's 6%.

Alcoa has a lot of work to do, but the company is not in dire straits. It is making efforts to reduce expenses. Demand is growing, but slowly. There is the prospect of accelerating growth as the world work's out its issue. The price is below $10, and presents a nice opening for a long-term hold. First, sign is that people start having jobs in the U.S. and Europe, like in the mythical times before 2008. The economy should improve. Once people are overpaid for doing next to nothing useful it is time to sell as that is as good a time as any to call a peak.

3. Copper is Running Out

Freeport-McMoRan Copper & Gold (NYSE: FCX) is a huge company that primarily mines copper, but they have extensive business practices that involve lots of elements and minerals. Freeport has extensive operations in Indonesia, and judging by some of the Economist articles it is a snake pit. Political considerations aside the company is capable of getting the copper to market. Considering the high demand for copper in electronics and construction that is a good trait to have. It would be wonderful if all the best resources were in economically feasible, but uninhabited wastelands. It seems like every fantastic source is under or around a population. The back story of Avatar had a mother lode under the only village.

Freeport is re-entering the energy business, and I think it's best to step back and wait for all that to settle before taking a position. Exposure to oil and gas coupled with integration issues probably makes the stock one to avoid. I think I will look into Southern Copper later. If the global economy really takes off and copper starts rising then Freeport will benefit massively, but I do not think we will be out of the current slump until at least 2014. I would avoid Freeport. It has not been paying down its long-term debt despite being profitable, and it is looking to add a ton of debt for these new acquisitions. Total debt would reach $20B, which is far too high for me to be comfortable buying FCX right now. At least until I gain a better understand of the trajectory of the copper market, and the potential of FCX in the energy sector.

TheArchivist has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus