Mining stocks have faced headwinds in the recent past with decelerating global growth. China remains one of the largest consumers of industrial commodities and the novel coronavirus pandemic impacted demand.
However, as economies crawl back to normalcy, mining stocks are likely to see positive action. Further, emerging economies like India will continue to trigger strong demand for industrial commodities.
In addition to industrial commodities, precious metals have been surging higher. This has translated into strong upside for gold mining stocks.
Another important point to note for the mining industry is that the balance sheets have remained “rock solid.” Once global demand accelerates, the top mining companies are positioned to accelerate investments and benefit from higher commodity prices.
Let’s look at the following mining stocks, which can be potential long-term value creators.
- Freeport-McMoRan (NYSE:FCX)
- Newmont Corporation (NYSE:NEM)
- Rio Tinto (NYSE:RIO)
- Vale S.A. (NYSE:VALE)
Mining Stocks to Buy: Freeport-McMoRan (FCX)
FCX stock has been gradually trending higher with an upside of 12% in the last six months. I believe that positive financial developments will translate into further upside.
If we look at the company’s second-quarter results and the guidance for the coming years, there are several positives. The company’s quarterly net income was the highest since fiscal year 2018. Further, the company reported an operating cash flow of $491 million for the quarter.
With guidance on EBITDA margin expansion due to cost cutting and higher realized prices, I expect annual OCF in excess of $2 billion. Strong cash flows will allow Freeport-McMoRan to de-leverage. For the second quarter, the company reported net debt of $8.4 billion. With strong cash flows, the company expects net debt to decline to $5.3 billion by the end of next year.
Freeport-McMoRan expects to incur annual capital expenditures of approximately $2 billion for the next three years. With these investments, the company expects to ramp up copper, gold and molybdenum sales. As commodity and precious metal price trends higher, the company stands to benefit.
Overall, Freeport-McMoRan is well past the most challenging times for the company. With lower debt, focus on the core business and higher commodity prices, the outlook is bright. FCX stock is therefore worth holding in the core portfolio.
Newmont Corporation (NEM)
With gold trading above $2,000 an ounce and with the positive momentum likely to sustain, a gold miner is a must have in the portfolio. I like NEM stock even after a massive rally of 49% in the last six months.
It’s worth noting that the coronavirus pandemic has decelerated growth globally and this implies continued expansionary policies. This will be positive for the precious metal and for gold mining stocks.
Specific to Newmont, there are several positive factors.
First, the company has a total liquidity buffer of $6.7 billion and a low net-debt-to-adjusted-EBITDA of 0.6. This allows the company to pursue aggressive growth to capitalize on higher gold prices.
Second, as gold trends higher, EBITDA margin will expand along with free cash flows. The company currently has an annual dividend payout of $1. I expect dividends to increase in the coming quarters. The company has also been creating value through share buybacks.
Additionally, the company expects to lower the all-in-sustaining-cost to $800 to $900 an ounce by 2023. Therefore, if gold remains firm, free cash flows will continue to swell.
Overall, Newmont has a solid balance sheet and this will allow the company to grow and create shareholder value. The bull-run for gold is likely to sustain and NEM stock is possibly the best among gold miners.
Rio Tinto (RIO)
Investors looking for a high-quality mining stock with a robust dividend yield need not look beyond RIO stock. Currently, the stock offers an annual dividend of $3.10 with a dividend yield of 5%.
In addition to the attractive dividends, RIO stock also trades at a price-earnings-ratio of 12.6. Valuations are therefore mouth-watering for long-term investors.
An important point to note is that China’s steel demand and production has already started trending higher. This is good news for Rio Tinto with the iron ore market remaining resilient. Once other economies gain growth traction, the stock is likely to witness a stronger upside.
However, even with the pandemic headwind, Rio Tinto delivered free cash flow of $2.8 billion for the first half of the year. With gradual economic recovery, the second half is likely to be better. Overall, as FCF continues to flow, dividends are safe and the company has financial headroom for accelerating investments.
RIO stock has moved higher by 15% in the last six months, but valuations suggest more upside for the stock. Long-term investors can consider fresh exposure at current levels.
Vale S.A. (VALE)
The dam burst incident has resulted in VALE stock remaining depressed. In the last six months, the stock has been marginally lower by 4%. For long-term investors, I see this as a good accumulation opportunity.
In terms of recovery from the dam burst incident, Vale has already reported gradual stabilization in ore production in the second quarter. Importantly, the company reported an EBITDA of $3.6 billion and free cash flow of $277 million. As operations stabilize further and demand grows from China, I expect higher FCF in the coming quarters. This should translate into upside for VALE stock.
Another indicator of potentially better times ahead is the company’s decision to resume dividend payments when it reported second-quarter results. The company does mention in its report that the “worst is likely behind us.”
Therefore, as production accelerates and translates into higher cash flows, I expect positive momentum for the stock in the coming quarters.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
