Commodities & Metals

Why Value Investors Must at Least Start to Look at Mining and Metals Stocks

Yamana Gold Inc. (NYSE: AUY) recently traded at $10.82. In February the share price was around $16.75, a drop of about 35%. Yamana has a market value of about $8.1 billion. The consensus target price from Thomson Reuters is $17.40 and the 52-week range is $10.34 to $20.59. Yamana has a dividend yield of 2.5%. The implied upside to the consensus target is about 61%.

Freeport McMoRan Copper & Gold Inc. (NYSE: FCX) recently traded at $30.40, “only” about 15% lower than the $35.70 February price. The company has a market value of about $28.9 billion, and the consensus target price is around $37.30. The 52-week range is $27.24 to $43.65. Freeport has a dividend yield of 3.8%. The upside implied by the consensus target is 23%. The company has completed its acquisition of McMoRan Exploration and Production and expects to complete its acquisition of Plains Exploration & Production by the end of this month.

Silver Wheaton Corp. (NYSE: SLW) recently traded at $22.50, almost 40% lower than $37 back in February. Its market value is about $8.1 billion. The consensus target price is $40.80, and the 52-week range is $21.45 to $41.30. Silver Wheaton has a dividend yield of 2.2%. The upside implied by the consensus target is 79%.

Pan American Silver Corp. (NASDAQ: PAAS) recently traded under $12, rather than around $18.40 as in February, for another loss of about one-third of its value. It has a market value of about $1.9 billion. The consensus price target is around $17.60, and the 52-week range is $11.51 to $22.83. The company’s dividend yield is 4.3%. The upside implied by the consensus price target is 44%.

Coeur Mining Inc. (NYSE: CDE) recently traded at $13.50, down about 40% from the $23.00 seen in February. Coeur has a market value of about $1.4 billion. The consensus target price from Thomson Reuters is $23.10 and the 52-week range is $12.92 to $31.97. Coeur does not pay a dividend. The upside implied by the consensus target is 71%. The company was known as Coeur d’Alene Mines until mid-May, when it reincorporated in Delaware and change its name.

Stillwater Mining Corp. (NYSE: SWC) recently traded at $12.05, down about 16% from an early February price around $14.40. Stillwater has a market value of about $1.42 billion. The consensus target price is $16.50, and the 52-week range is $7.47 to $14.87. Stillwater does not pay a dividend. The upside implied by the consensus target is 37%.

Base Metals Mining Stocks

We have already looked at Freeport-McMoRan in the section on precious metals. Freeport’s production, however, is primarily copper. The company sold about 3.65 billion pounds of copper in 2012 and 1.01 million ounces of gold. At an average 2012 LME price of $3.60 a pound for copper and a London price of $1,669 an ounce for gold, the value of the copper topped $13 billion and the gold was worth about $1.7 billion.

BHP Billiton PLC (NYSE: BHP) recently closed at $66.73, down from an early February price of about $77.90, a drop of 14%. BHP has a market value of $177.5 billion. The consensus price target is around $62.90. The company has a dividend yield of 3.4%. The current price is about 6% above the consensus target, indicating that BHP is fully valued.

Rio Tinto PLC (NYSE: RIO) recently traded at $43.54, down from an early February price of $57.58, a decline of about 24%. Its market value is about $80.4 billion. The consensus price target is around $72.00, and the stock’s 52-week is $41.59 to $60.45. The company pays a dividend yield of 4.2%. The upside implied by the consensus price target is 66%.

Vale S.A. (NYSE: VALE) is trading around $15.20, versus $19.85 in early February. Vale’s market value is $79.7 billion and the consensus price target is around $22.25. Its 52-week range is $15.37 to $21.88, and Vale’s dividend yield is about 4.8%. The upside implied by the consensus price target is nearly 44%.

Copper closed at about $3.30 a pound on Friday, down 8% from last year’s average LME price for the red metal. Iron ore is down about $13 a ton in the past 12 months, and aluminum is down about 12%. Whether prices recover depends to a large extent on demand from China — and we all know how that has gone in the past couple of months.

Some Observations

In precious metals, the only winner this year has been palladium, which is a cheaper alternative to platinum in the manufacturing of automobile catalytic converters. For investors who cannot resist, there are three ETFs that offer a play on palladium: the ETFS Physical Precious Metal Basket Shares (NYSEMKT: GLTR), the PowerShares DB Precious Metals Fund (NYSEMKT: DBP) and the ETFS Physical Palladium Shares (NYSEMKT: PALL).

Whether or not gold and silver prices recover, the gold and silver miners are facing another difficult year. One thing to watch for is an increase in hedging. During the run-up in gold prices, hedging virtually disappeared. Hedging silver has picked up again, and some smaller gold miners have also started hedging production again. If (when?) Barrick or Newmont open hedging books on gold production again, a prudent investor may conclude that the miners see prices continuing to slide.

There is room for a contrarian to at least start thinking about mining stocks at this point. It is amazing to think that big precious metals mining stocks are trading at levels roughly equal to where we saw them during the depths of the recession. It is as if gold prices went back to $800, even though they have not.

Investors who conclude that the stocks have reached a bottom and who are willing to wait for two or three years may believe that now is a good time to begin accumulating shares. The biggest consideration at this point in comparing now to 2009 is that many miners have committed to mining projects that pull gold and silver out at a far higher price than just a few years ago.

Of the precious metals players, only Silver Wheaton remains somewhat insulated from rising costs. It may take the stock a while to turn around, but this one should recover ahead of the miners. Shares are still trading more than 60% higher than at the bottom of the recession in 2009.

There is no free lunch in precious metals investing. Silver is referred to by some traders as “The Devil’s Metal” for a reason, and buying individual miners comes with geopolitical, labor strike, environmental shut-down and mine cessation risks.

We have included an image from Yahoo! Finance that should represent just how bad the carnage has been in the miners, versus the price of gold in the past five years. Needless to say, this has been very ugly and painful.

GDX vs GLD