Commodities are undervalued and as the rally sustains, metal and mining stocks will deliver robust returns
Metal and mining stocks have been trending higher in the last few quarters. And this upside has been in-sync with a broad-based rally for commodities.
The rally is evident from the fact that the Core Commodity CRB Index has surged by 56.5% in the last 12 months. However, I believe that there is more upside for commodities.
First and foremost, commodities are one of the most undervalued asset class. To put things into perspective, in the last 20-years, commodities are the only asset class that has delivered negative returns. Even in the last five years, commodities have provided an annual return of just 1.4%. It seems very likely that the current rally in commodities will sustain as investors shift to undervalued asset classes.
Furthermore, the Federal Reserve is likely to keep interest rates low through 2023. Even beyond that, interest rates will increase in baby-steps. Expansionary monetary policies are positive for metal and mining stocks.
Given these factors, I would hold a few stocks from the commodities segment. So, let’s talk about the four metal and mining stocks to consider.
- Freeport-McMoRan (NYSE:FCX)
- Newmont Corporation (NYSE:NEM)
- Rio Tinto (NYSE:RIO)
- Southern Copper (NYSE:SCCO)
Now, let’s dive in and take a closer look at each one.
Best Metals & Mining Stocks to Buy: Freeport-McMoRan (FCX)
Even after a rally of 245% in the last 12 months, FCX stock is among the most attractive metal and mining stocks. The stock still trades at a forward price-earnings (P/E) ratio of 14.2. Moreover, with copper likely to see a multi-year rally, FCX stock is worth considering.
For the first quarter of 2021, Freeport reported operating cash flow of $1.1 billion. This would imply an annualized cash flow of $4.4 billion. Healthy cash flows will ensure that the company can de-leverage. At the same time, dividends are likely to increase in the coming years. As a matter of fact, the company’s net debt has declined to $5.2 billion in Q1 2021 from $8.5 billion in Q1 2020.
In terms of growth, Freeport reported copper production of 3.2 billion pounds in 2020. Production is expected to increase to 3.85 billion pounds in the current year. And further to 4.4 billion pounds in 2022. Clearly, the company is positioned to benefit from higher production coupled with higher price realization.
Freeport also expects gold sales to double from 0.9 million OZS in 2020 to 1.8 million OZS by 2023. Given the decline in net debt, the company has ample financial flexibility to increase capital expenditure in the next few years. Overall, FCX stock remains attractive and a renewed rally is likely after some consolidation.
Newmont Corporation (NEM)
Among metal and mining stocks, I am also bullish on gold as an investment theme. The Federal Reserve is likely to pursue expansionary monetary policies through 2023. Even beyond this period, interest rates are likely to increase in baby-steps. It seems very likely that gold will trend higher in the coming quarters as high inflation persists.
NEM stock is among the best bets among gold mining stocks. The company has quality assets and a strong financial profile. Furthermore, the stock has declined from highs of $74.75 to current levels of $62.60. I see this correction as a good accumulation opportunity.
From a business perspective, the company has 94Moz of gold reserves and 101Moz of gold resources. The current asset pipeline is likely to ensure that stable production sustains through 2040. This is the biggest reason to be bullish on the stock.
Additionally, for the current year, the company has guided for an all-in-sustaining-cost of $970 an ounce. By 2025, the company expects to reduce the AISC to decline to $800 to $900 an ounce. Even if gold is trading near $2,000 an ounce, Newmont Mining is well positioned to deliver robust free cash flows.
Therefore, I expect dividends to sustain. Additionally, Newmont is likely to have ample financial headroom for increasing its asset base. Therefore, NEM stock is another top-pick from among the metal and mining stocks.
Best Metals & Mining Stocks to Buy: Rio Tinto (RIO)
RIO stock has been in a consolidation zone in the last six months. Considering the bullish outlook for the metal and mining sector, a break-out on the upside seems imminent.
It’s also worth noting that RIO stock trades at a forward P/E of 6.4. Moreover, the company pays an annual dividend of $4.64, which implies a dividend yield of 5.46%. Therefore, the stock is attractive for income investors with a strong financial profile.
For 2020, Rio Tinto reported free cash flow of $9.4 billion. Robust cash flows give ample financial flexibility to sustain dividends. At the same time, the company can pursue growth projects.
It also seems that Rio Tonto is looking for diversification. Recently, the company signed a memorandum of understanding with InoBat. The latter is a European battery technology and manufacturing company. The partnership “will cover the full commodity life-cycle from mining through to recycling of lithium.” As demand for lithium surges with global adoption of electric vehicles, Rio Tinto seems to be making the right moves.
Furthermore, Rio has also partnered with Comptech. The partnership intends to bring new generation of aluminum alloys for electric vehicles and 5G antennas. Of course, iron ore production and sales remain the cash cow for the company. In addition, the company is also in the mining of copper and aluminum.
Overall, RIO stock is attractive for income investors. Additionally, considering the valuations, the stock seems positioned for further upside.
Southern Copper (SCCO)
Goldman Sachs believes that copper is new oil. In fact, Goldman estimates copper price to increase to $15,000 per ton by 2025. Given this outlook, it makes sense to talk about another copper focused company.
SCCO stock currently trades at an attractive forward P/E of 20.3. The stock also offers an annualized dividend of $2.80. Given the outlook for copper prices, it’s likely that dividends will continue to increase in the coming years.
It’s also worth noting that Southern Copper has reported reserves of 67.7Mt. In 2019, the company’s mine life was 68 years. With asset expansion, the company expects mine life at 50 years in 2028. Clearly, the company is positioned for robust cash flows if the bull-run for copper sustains.
For the current year, Southern Copper expects free cash flow of $2.2 billion. With a guided net-debt-to-EBITDA of 0.4, the company has a strong financial profile.
In addition, the company has among the lowest cash-cost in the industry. Even if copper is sideways, Southern Copper is positioned to generate robust FCF in the coming years.
Considering these factors, SCCO stock is attractive. In the last six months, SCCO stock has been sideways. The next-leg of the rally seems imminent considering the outlook for the metal and mining sector.
Note: This article originally appeared at InvestorPlace.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.