As we move further into earnings season we are starting to see some of the reports from mining stocks, and it is still a messy picture. If you make your money digging stuff out of the ground, you’re having a pretty tough go of it in 2014.
Although there are signs and whispers of improvements, that’s not showing up in the earnings numbers just yet. These basic resources need a stronger economy that worked off excess supplies as well as a reduction in capacity that creates firmer pricing, and so far none of that is happening to any great degree.
The global economy may be better than it was a few years ago, but it’s still nowhere near strong enough to help the mining companies see any real profit growth. Of course, the more the short picture is bleak, the more interested my contrarian value mind is intrigued and interested
Teck Resources (TCK)
Teck Resources (TCK) is a great example of what is going on with mining stocks today. This company mines a wide range of minerals and metals including copper, zinc lead, molybdenum, germanium, indium, cadmium; gold and silver, and fertilizers and sulphur products. The Canadian company reported earnings of just 13 cents compared to 34 cents in the comparable quarter of 2013. Low coal and copper prices were the chief culprit for the earnings decline. Revenues were only down about 7%, but high production costs and low selling prices for their two largest resources squeezed margins a great deal.
While the short-term outlook isn’t great and investors have shunned the stock, the truth is that the stock is pretty attractive from a long-term perspective. Shares of TCK trade for less than 80% of book value and yield 3.47% right now.
Peabody Coal (BTU)
Short-term results weren’t much better for coal miners. Peabody Coal (BTU) is the largest publicly traded coal company, and it reported a loss of 28 cents per share for the second quarter. While that is less than BTU lost last year, it’s still a loss of $72 million in three months, and management expects a larger loss next quarter. Again, production was up both in the U.S. and Australia, but lower selling prices crushed any hope of a profit in the quarter.
Arch Coal (ACI)
Arch Coal (ACI) reported a loss of 46 cents per share, which is greater than the 2013 second-quarter loss of 34 cents per share. Revenue dropped by about 6% and Arch Coal’s results were also largely a product of coal prices that have fallen back to 2007 levels. Tougher coal regulations in the USW and weak demand from the global economy make coal mining a brutally tough business right now.
Of course, all this just makes me like coal and coal miners all the more. The truth is, no matter what restrictions we may place on coal here in the U.S., the rest of the world is going to continue to burn this cheap abundant fuel supply. I own Arch Coal as a call option on the emerging markets and European use of coal, and I would back up the truck for Peabody if the stock would just fall to a large enough discount to book value. I suspect it will before too much longer.
Bottom line: The short-term outlook for mining of all stripes as reflected in the quarterly earnings reports is pretty bleak. This has caused the stocks to slip to bargain levels, and unless the world ends the outlook for these companies over the next decade is very bright.
As of this writing, Tim Melvin was long ACI.