Their shares, however, trade cheaply amid worries that the good times in industrial commodities are ending. For investors willing to accept some risk, the Big Five miners offer a rich opportunity.
The five have price/earnings ratios in the single digits—some of the lowest of any major industry group in the global stock markets. And their dividends are generally ample. Rio Tinto’s trailing 12-month yield is 14%.
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“All of the stocks are attractively valued,” says Chris LaFemina, a Jefferies analyst. “Balance sheets are especially strong, and free cash flow is high. A lot of the damage to the stocks from lower iron-ore prices is already priced in. If China stops slowing, these stocks are very underpriced.”
A sustained economic slowdown in China is the big fear. The country accounts for about half of all worldwide demand for commodities like iron ore and copper. Prices for iron ore—the biggest profit contributor at BHP (ticker: BHP, BBL), Rio Tinto (RIO), and Vale (VALE)—have fallen 50% from spring highs, to about $120 a metric ton. This past week, their descent continued, falling 7.5% after China reported a 13% drop in August steel production. As a result, mining stocks have declined. BHP is 30% below its May high.
“The market is trading this on the next China data point, whereas the long-term valuation argument is pretty compelling,” LaFemina says.
Even with the slump in iron ore, the producers remain highly profitable. BHP and Rio Tinto’s estimated all-in costs, including transportation to China, are about $35 a ton.
Other commodities are in better shape. Copper, at $4.30 a pound, is down 10% from its spring peak, but up 20% this year. Aluminum is up 40% in 2021, while thermal coal prices have doubled.
The mining industry has been playing up its green credentials as it seeks to appeal to socially responsible investors. “Metals and mining are critical to the decarbonization of the world,” says Charl Malan, senior analyst for natural resources equity strategy at VanEck. “It goes beyond minerals like lithium and cobalt that people are talking about, and includes aluminum, copper, and the platinum group metals.”
Companies are cutting the carbon footprint of their mining operations. BHP is getting out of the oil-and-gas business, while Anglo American (NGLOY) is divesting its thermal-coal business. One problem is that the production of steel from iron ore is very carbon-intensive.
LaFemina argues that Anglo American and Glencore (GLNCY) are decarbonization plays because of their production of metals that are critical to renewable power and electric vehicles. Glencore is the top global producer of cobalt, a vital battery metal.
Unlike major energy companies, the large miners generally have little or no net debt. Rio Tinto had $3.1 billion of net cash on June 30, versus about $57 billion of net debt for
(XOM), for example.
The combination of strong balance sheets and limited capital spending has led to rising dividends, particularly for BHP, Rio Tinto, and Vale. LaFemina calls those three companies high-yield bond proxies. Trailing 12-month yields for BHP and Vale are both about 10%.
All are showing restraint on capital spending. VanEck’s Malan notes that total capital spending at the Big Five miners, plus
(TECK), should total about $35 billion this year, down from $80 billion a decade ago.
“Talk to the miners and they will say they are mining for profitability and not trying to get big,” he says.
The dividend policies of the international miners are unfamiliar to many U.S. investors. Most pay semiannual dividends that fluctuate with profits. Rio Tinto, for instance, targets dividends at 40% to 60% of earnings, but it also issued a large special dividend in the first half of 2021, for a total payout ratio of 75%. U.S. companies typically pay fixed dividends each quarter. Investors need to accept dividend variability, but overall dividends should be generous, barring a collapse in commodity prices.
|Company / Ticker||Recent Price||YTD Change||2021E EPS||2021E P/E||2022E EPS||2022E P/E||Market Value (bil)||Yield*||Key Commodities Produced|
|Anglo American / NGLOY||$18.03||10%||$3.87||4.7||$2.80||6.4||$44.9||9.5%||Iron ore, palladium, copper|
|BHP Group / BHP**||55.68||-15||7.84||7.1||5.78||9.6||136.6||10.8||Iron ore, copper, coal|
|Glencore / GLNCY||8.99||49||1.23||7.3||1.11||8.1||59.8||3.6||Copper, coal, zinc|
|Rio Tinto / RIO||68.05||-6||14.90||4.6||10.72||6.3||111.6||14.2||Iron ore, copper, aluminum|
|Vale / VALE||16.26||-3||5.40||3.0||4.12||4.0||85.9||10.0||Iron ore, copper, nickel|
E=estimate; *Last 12 months; **Estimated EPS and P/E for June 2022 and June 2023 fiscal year ends
Sources: Bloomberg; FactSet
Here’s a look at mining’s Big Five:
BHP generated about 70% of its profits from iron ore in its fiscal year ending in June. The Australian company is also one of the world’s largest copper producers, thanks to its majority ownership of the huge Escondida mine in Chile.
The company plans to combine its dual-listed shares in Australia and the United Kingdom into the Australian shares, simplifying its structure. There are now U.S.-listed American depositary receipts for both the Australian stock, traded under the BHP ticker, and the U.K. stock, with a BBL ticker. LaFemina favors the BBL shares, which trade around $53, a $3 discount to the BHP shares.
“American investors should favor BBL because it’s got a lower share price and has the same dividend,” he says. The spread between BHP and BBL should close if shareholders approve the share-class consolidation next year.
BHP is valued at about six times projected earnings for the fiscal year ending in June 2022. BHP doled out a generous 90% of its earnings, or $4 a U.S. share, in dividends for the first half of 2021.
Australia-based Rio Tinto is the only one of the five with no exposure to fossil fuels, a plus for socially conscious investors. Like BHP, Rio Tinto gets a huge chunk of its profits—about 75%—from iron ore. It is also a sizable producer of copper and aluminum. Its 2007 deal for
is finally paying dividends, with aluminum prices up 40% this year, to about $1.30 a pound.
VanEck’s Malan likes Rio Tinto, arguing that it is cheaply valued and has led the industry in reducing debt. The U.S. shares, at about $68, trade for five times projected 2021 earnings of $15 a share and for six times estimated 2022 profits.
With little else to do with its free cash flow, Rio Tinto is paying it out—$5.60 in first-half dividends. LaFemina sees $11 a share in 2022 earnings, and that assumes iron-ore prices at about $130 a ton, not far above current levels.
Anglo American, founded more than a century ago in South Africa by Ernest Oppenheimer, is more diversified than BHP and Rio Tinto, getting about 40% of its profits from iron ore.
The London-based company is the only one of the big miners with significant exposure to platinum group metals (platinum, palladium, and rhodium), and it controls DeBeers, the world leader in diamonds.
“Among the Big Five, Anglo stands out because of its growth,” LaFemina says. The company owns a majority stake in a large Peruvian copper mine that is due to start production in 2022, and that could help boost its copper output by 40% by 2023. With net debt down to $2 billion, Anglo American ramped up dividends in the first half of 2021, paying nearly $1.25 on its U.S. listed shares, which are now trading around $18.
Prices of platinum and related metals have slid recently, reflecting reduced demand from the auto sector. The metals are used for catalytic converters. As a result, the shares trade cheaply, at about five times projected 2021 earnings and six times estimated 2022 profits.
Glencore is the only giant miner that does not extract iron ore. It’s a large producer of base metals, including copper, zinc, and nickel. The company is the “hands-down” favorite of RBC Capital Markets analyst Tyler Broda. “Its commodities are in a different part of the cycle,” he says.
One of the world’s largest coal producers, Glencore has rejected calls to exit the sector. It has benefited from the doubling in prices this year for thermal coal, used by electric utilities.
Glencore also has an attractive commodity trading business that generated almost $2 billion in first-half operating profits.
The company’s U.S.-listed shares—at a recent at $9 on the Pink Sheets, near its 52-week high—fetch eight times projected 2022 consensus earnings.
Based on current commodity prices, Broda says, Glencore is valued at a little less than three times annual earnings before interest, taxes, depreciation, and amortization, or Ebitda.
Glencore is boosting its distributions (the equivalent of dividends) and initiating a stock buyback program because of higher earnings and a reduction in its net debt. The current yield is about 3%, based on projected 2021 payouts.
One risk is an investigation by the U.S. Department of Justice into its international trading operations. LaFemina sees a settlement, with a fine of $1 billion to $2 billion.
Vale, the world’s largest producer of iron ore, is the biggest Brazilian company at $85 billion. Its stock, at about $16, is down from a June peak of $23 and trades for just three times projected 2021 earnings and four times estimated 2022 profits.
Citigroup analyst Alexander Hacking recently wrote that Vale “has an attractive, midsize base-metals business” including a large nickel operation that isn’t reflected in its stock price. He has a Buy rating and $22 price target.
RBC’s Broda sees Vale as inexpensive, with a 15% projected free cash flow for 2022, assuming an iron price of $110 a ton, below current spot prices.
Vale, however, has been plagued by mining disasters, including one in Brazil in 2019, when a dam holding mining waste collapsed and killed 270 people.
Write to Andrew Bary at email@example.com