All Isn't Well, But It May Be Time to Dig Deep into Mining Stocks
Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While U.S. markets remain undaunted by the ongoing crisis in Cyprus, not all stocks are created equal. The broad equity market return diverges from returns of mining stocks; the latter has remained a laggard and has tanked while the market soared.
Over the last six months, the Dow Jones Mining Index has lost 21% while the Dow has gained 6.8%. The comparisons with other benchmark indices are similar. This underperformance has largely been due to concerns of the global economy hitting a slowdown.
Mining companies globally have reacted to falling ore prices by rolling back their capital spending plans. As a result, companies such as Thompson Creek (NYSE: TC) , Cliffs Natural Resources (NYSE: CLF), and Molycorp (NYSE: MCP) have been at the receiving end.
The U.S. economy’s dichotomy presents opportunities
Given the situation in Europe and China, these concerns are not unfounded, but at the same time, material differences between a surging U.S. economy and rest of the world present a scenario which requires further prodding. In line with global trends, valuations are largely depressed in this area - even for companies primarily operating in the U.S. Since the country is enjoying a recovering economy, it is no-brainer that the space could be full of opportunities.
One such company is Colorado-based diversified player Thompson Creek. Thompson Creek is primarily engaged in mining molybdenum, copper and gold, with the majority of operations in North America.
For all practical purpose, the company can be considered a U.S. producer of molybdenum. During 2012, the company generated nearly 80% of its revenues from its U.S. molybdenum operations. Unlike gold, molybdenum is used in a variety of industrial applications.
Thompson Creek is not a profitable company, but a look at its operational performance reveals that the net effect of a lower average sales price more than offsets the benefits from operational improvements. Lower prices have caused its molybdenum inventory to soar. Now, building up inventory is a harmful practice, but so is selling it at throwaway prices. This oversold stock currently trades below its book value of $8.30.
Similarly, Cliffs Natural Resources derives nearly 48% of its revenues from the U.S. and Canada, while a large chunk is contributed by China. The company is engaged in extracting iron ore and coal.
For structural reasons, the short-to-medium term outlook for these commodities is bleak. It is no wonder, then, that the stock is regularly reaching fresh 52-week lows. At around $20 a share, it is already trading below the book value of $32.50 and as such, the downside may be limited. In this sense, with a yield of 2.9%, it may be attractive for dividend hunters.
Rare does not mean hot now
Rare earth poster child Molycorp has seen the worst of the times lately, with more than 55% value erosion in the last six months. Its financial performance has also been volatile lately, reflecting weak prices for rare earth metals. As the initial euphoria surrounding electric cars has died its natural death, prices of these rare earth metals have come down substantially and there are no triggers for a spike anytime soon.
China, which controls over 90% of the global supply of these metals, is itself sustaining a drop in industrial activity, leading to greater availability for exports. While a substantial increase in rare earth metal prices in the short term is unlikely, the market is poised to recover in the long term due to steadily increasing demand for rare earth metals in a number of applications and products.
Overall, the opportunity in U.S. mining space is a significant one. It may be difficult to put a timeline on the recovery, but, as they say, the early bird gets the worm. Keeping an eye on quarterly financial performance will help investors identify when it might be good to start a buying spree.
Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!