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4 Non Ferrous Metal Mining Stocks Defying Industry Odds

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The prospects of the Zacks Mining - Non Ferrous  industry looks bleak at the moment given apprehensions regarding slowing demand and economic activity due to the rapid spread of the Delta variant of coronavirus. This might lead to production cutback as seen last year when the coronavirus struck. On top of this, the industry players are grappling with inflated input costs, labor shortages and supply chain issues.

Miners like Freeport-McMoRan Inc. (FCX - Free Report) , Southern Copper Corporation (SCCO - Free Report) , Aluminum Corporation of China Limited (ACH - Free Report) and Centrus Energy Corp. (LEU - Free Report) , in the meantime, are focusing on controlling costs, investing in technology and improving production efficiency.

About the Industry

The Zacks Mining - Non Ferrous industry comprises companies that produce non-ferrous metals, including copper, gold, silver, cobalt, molybdenum, zinc, aluminum and uranium. These metals are utilized by a wide array of industries that include aerospace, automotive, packaging, construction, machinery, electronics, transportation, jewelry, chemical, and nuclear energy. Mining is a long, complex and capital intensive process. Significant exploration and development to evaluate the size of the deposit followed by assessment of ways to extract and process the ore efficiently, safely and responsibly precedes actual mining. The miners continually search for opportunities to grow their reserves and resources through targeted near-mine exploration and business development. They strive to upgrade and improve the quality of their existing assets, internally and through acquisitions.

What's Shaping the Future of Mining-Non Ferrous Industry

The Imminent Threat of Delta Variant: The coronavirus pandemic had impacted non-ferrous metal prices last year barring gold, which gained on the back of its safe-haven demand. Miners had to curtail or stop production to adhere to restrictions imposed by various governments to stem the spread of COVID-19. Slowdown in industrial activity severely impacted demand for industrial metals like copper and silver. Commodity prices have regained ground this year, courtesy of improving industrial activity globally, rollout of vaccines, optimism regarding a strong US economic growth and robust demand from China. The rising infections of Delta variant and impending fears that it might hamper the ongoing economic recovery might hurt the industry again.

Cost Control & Innovation to Increase Efficiency: The industry has been facing a shortage of skilled workforce, which has led to a spike in wages. Labor-related disputes can be damaging to production and revenues. The industry players are also facing escalating production costs including electricity, water and materials as well as supply chain issues. Since the industry cannot control the prices of its products, it focuses on improving sales volume, operating cash flow and lowering unit net cash costs. The industry participants are opting for alternate energy sources in order to minimize fuel-price volatility and secure supply. Miners are now committed to cost-reduction strategies and digital innovation to drive operating efficiencies.
 
Impending Demand and Supply Imbalance: The industry players are currently dealing with depleting resources, declining supply in old mines and lack of new mines. Development projects are inherently risky and capital intensive. Demand for non-ferrous metals will remain high in the future given their wide usage in primary sectors including transportation, electricity, construction, telecommunication, energy, information technology and materials. President Biden’s plan to overhaul and upgrade the nation’s infrastructure and promote green policies will require huge amount of non-ferrous metals. While demand remains strong, there will be an eventual deficit in metal supply leading to a situation that will bolster metal prices. This, in turn, will favor the industry in the long haul.

Zacks Industry Rank Indicates Dim Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Zacks Mining - Non Ferrous industry, which is an eight stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #185, which places it at the bottom 27% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over the past month, the industry’s earnings estimate for the current year has gone down 1%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Versus Broader Market

The Zacks Mining- Non Ferrous Industry has outperformed the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively gained 67% in the past year compared with the S&P 500 and its sector’s rally of 30.1% and 25.2%, respectively.

One-Year Price Performance



 

Industry's Current Valuation

On the basis of trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Mining- Non Ferrous stocks, we see that the industry is currently trading at 7.47X compared with the S&P 500’s 16.00X. The Basic Materials sector’s trailing 12-month EV/EBITDA is at 7.47X. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)


 

Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)


 

Over the last five years, the industry has traded as high as 13.74X and as low as 1.23X, with the median being at 8.56X.

4 Mining-Non Ferrous Stocks to Keep an Eye On

Centrus Energy: Headquartered in Bethesda, MD, the company is a globally recognized supplier of Low-Enriched Uranium (“LEU”) fuel. Its order book runs to around $1 billion, with contracts extending to the end of the decade, which poises it well for growth. Centrus is uniquely positioned to lead the transition to a new nuclear fuel known as High-Assay, Low-Enriched Uranium (“HALEU”), that is required by the commercial and/or government sectors for a number of advanced reactor and fuel designs currently under development. Recently, Centrus received the license to produce HALEU at its Piketon, OH, facility — the only company in the United States licensed to do so. It expects to begin production next year. Backed by this upbeat prospects, shares of the company have soared 166% over the past year.

The Zacks Consensus Estimate for the company’s fiscal 2021 earnings has been revised upward by 9% over the past 90 days. It has a trailing four-quarter earnings surprise of 23.7%, on average. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: LEU


Freeport-McMoRan: The company is conducting exploration activities near existing mines with a focus on opportunities to expand reserves. At Cerro Verde, a large-scale concentrator expansion project will provide incremental annual production of around 600 million pounds of copper and 15 million pounds of molybdenum. The Lone Star project is completed and is on track to produce more than 200 million pounds of copper annually. Freeport is also assessing a large-scale milling operation at El Abra to process additional sulfide material. The expansion at Morenci has resulted in an increase in milling rates. Its effective cost management and efforts to reduce debt levels appear encouraging. Shares of the company, which carries a Zacks Rank #3 (Hold), have soared 135% driven by expected benefits from its exploration activities.

Based in Phoenix, AZ, this company is engaged in mineral exploration and development; mining and milling of copper, gold, molybdenum and silver; and smelting and refining of copper concentrates. The Zacks Consensus Estimate for earnings for fiscal 2021 has moved up 4% over the past 90 days. The company has a trailing four-quarter earnings surprise of 5.9%, on average.

Price & Consensus: FCX

Southern Copper: The company has the largest copper reserves in the industry and operates high-quality, world-class assets. Its constant focus on increasing low-cost production is commendable. The company will benefit from its efforts to grow in Peru, given that the country is currently the second largest producer of copper globally and holds 13% of the world’s copper reserves. It is worth mentioning that Peru’s national output is expected grow to 225000 tons in 2022 and 245000 tons in 2023. Southern Copper’s total investment program in Peru runs to $7.9 billion. Backed by these factors, and higher copper and silver prices, shares of the company have gained 34% in a year’s time.

The Zacks Consensus Estimate for the Phoenix, AZ based company’s fiscal 2021 earnings has been revised upward by 5% over the past 90 days. It has a trailing four-quarter earnings surprise of 10.2%, on average. The company, which engages in mining, exploring, smelting, and refining copper and other minerals, has a long-term estimate earnings growth of 17.7%. It currently carries a Zacks Rank #3.

Price & Consensus: SCCO

Aluminum Corporation of China Limited: Also known as Chalco, the company is the second largest aluminum producer by capacity in the world. It recently reported its highest half-year profit since 2007 on rising aluminium prices and higher output of the metal. Given its nine primary aluminum smelters, the company’s scale of production enables it to meet large customer orders and maintain a large customer base. Its sophisticated technological innovation system and stronger innovation capability sets it apart from its domestic competitors. As a leading integrated alumina and primary aluminum producer in China, it is able to supply alumina internally to its primary aluminum plants, consequently saving on transportation, warehousing and related costs. The company continues to make investments in its expansion efforts, both domestic and overseas. Last year, it completed the construction of the Boffa Project in Guinea, which is now fully operational. It is expected to be an important source of overseas bauxite resources for Chalco.  Its shares have appreciated 141% over the past year.

The Zacks Consensus Estimate for the Beijing, China-based company’s earnings for the current fiscal year has moved up 91% over the past 90 days. The stock carries a Zacks Rank #3.

Price & Consensus: ACH