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U.S. Metals and Mining Industry Analysis

UpdatedOct 01, 2022
DataAggregated Company Financials
  • 7D1.8%
  • 3M-10.8%
  • 1Y-14.7%
  • YTD-23.5%

The Metals and Mining industry is up 1.8% in the last week, with Agnico Eagle Mines up 8.1%. In the same time, Worthington Industries was down 21%. In contrast, the industry has lost 15% in the last 12 months. As for the next few years, earnings are forecast to decline by 4.2% per annum.

Industry Valuation and Performance

Has the U.S. Metals and Mining Industry valuation changed over the past few years?

DateMarket CapRevenueEarningsPEAbsolute PEPS
Sat, 01 Oct 2022US$260.1bUS$296.7bUS$44.3b6.3x5.9x0.9x
Mon, 29 Aug 2022US$305.1bUS$296.8bUS$44.5b7.2x6.9x1x
Wed, 27 Jul 2022US$281.4bUS$288.6bUS$43.2b7.3x6.5x1x
Fri, 24 Jun 2022US$296.1bUS$282.0bUS$42.1b7.9x7x1x
Sun, 22 May 2022US$339.7bUS$280.6bUS$41.9b8.3x8.1x1.2x
Tue, 19 Apr 2022US$440.8bUS$260.7bUS$35.6b11.6x12.4x1.7x
Thu, 17 Mar 2022US$392.1bUS$259.2bUS$35.4b10.1x11.1x1.5x
Sat, 12 Feb 2022US$352.0bUS$248.3bUS$33.8b9x10.4x1.4x
Mon, 10 Jan 2022US$334.6bUS$233.3bUS$28.3b8.9x11.8x1.4x
Wed, 08 Dec 2021US$309.2bUS$232.3bUS$28.0b9.2x11x1.3x
Fri, 05 Nov 2021US$315.0bUS$230.8bUS$27.6b9.4x11.4x1.4x
Sun, 03 Oct 2021US$293.3bUS$195.4bUS$17.9b11.4x16.4x1.5x
Tue, 31 Aug 2021US$322.1bUS$198.0bUS$18.0b11.8x17.9x1.6x
Wed, 07 Jul 2021US$319.4bUS$193.5bUS$16.6b12.7x19.3x1.7x
Sat, 10 Apr 2021US$298.8bUS$168.4bUS$7.7b13.5x38.9x1.8x
Fri, 01 Jan 2021US$258.2bUS$156.9bUS$3.5b12x73.3x1.6x
Mon, 05 Oct 2020US$202.2bUS$154.5bUS$2.0b14.3x101.1x1.3x
Thu, 09 Jul 2020US$181.1bUS$157.8bUS$2.4b12.8x74x1.1x
Wed, 01 Apr 2020US$130.5bUS$160.2bUS$4.5b6.1x28.8x0.8x
Sat, 04 Jan 2020US$190.3bUS$164.4bUS$5.8b9.4x32.5x1.2x
Tue, 08 Oct 2019US$163.4bUS$168.5bUS$9.2b8x17.9x1x
Price to Earnings Ratio


Total Market Cap: US$163.4bTotal Earnings: US$9.2bTotal Revenue: US$168.5bTotal Market Cap vs Earnings and Revenue0%0%0%
U.S. Metals and Mining Industry Price to Earnings3Y Average 38.3x202020212022
Current Industry PE
  • Investors are pessimistic on the American Metals and Mining industry, indicating that they anticipate long term growth rates will be lower than they have historically.
  • The industry is trading at a PE ratio of 5.9x which is lower than its 3-year average PE of 38.3x.
  • The 3-year average PS ratio of 1.3x is higher than the industry's current PS ratio of 0.88x.
Past Earnings Growth
  • The earnings for companies in the Metals and Mining industry have grown 69% per year over the last three years.
  • Revenues for these companies have grown 21% per year.
  • This means that more sales are being generated by these companies overall, and subsequently their profits are increasing too.

Industry Trends

Which industries have driven the changes within the U.S. Materials industry?

US Market-2.48%
Metals and Mining1.83%
Precious Metals and Minerals11.35%
Diversified Metals and Mining-0.31%
Industry PE
  • Investors are most optimistic about the Diversified Metals and Mining industry which is trading above its 3-year average PE ratio.
    • Analysts are expecting annual earnings growth of 35.9%, which is higher than its past year's earnings growth of 29.0% per year.
Forecasted Growth
  • Analysts are most optimistic on the Silver industry, expecting annual earnings growth of 104% over the next 5 years.
  • This is better than its past earnings decline of 98% per year.
  • In contrast, the Steel industry is expected to see its earnings decline by 29% per year over the next few years.

Top Stock Gainers and Losers

Which companies have driven the market over the last 7 days?

CompanyLast Price7D1YValuation
AEM Agnico Eagle MinesUS$42.238.1%
SCCO Southern CopperUS$44.843.2%
FCX Freeport-McMoRanUS$27.332.4%
NEM NewmontUS$42.031.9%
RGLD Royal GoldUS$93.826.4%
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Sep 30

Top Large-Cap Magic Formula Stock For September: Nucor

Summary Joel Greenblatt created the "Magic Formula", a metric for both cheap and good. The Magic Formula screener is based on Joel Greenblatt's book "The Little Book That Beats The Market." This article discusses the top scoring stock for the month of September in large cap stocks, $12 Billion and larger market cap size. What is Magic Formula Investing? Magic formula investing is based on Joel Greenblatt's popular investing book, The Little Book That Beats the Market. Not long after the book was published, Joel Greenblatt's team created a free stock screener that would trawl for stocks that were both cheap and good, based on metrics described in the book. The top stock by the score for the month in the large-cap segment of the stock market is Nucor (NUE), one of the United States' oldest and largest producers of various steel products. Even though steel prices have been sinking as of late, the company has maintained a relatively healthy chart, even though the last recession. This is a very efficient operator with high returns on invested capital, low debt, and increasing free cash flow. My thesis is this stock is a buy, especially accumulating into the weakness that the overall stock market is presenting. Magic Formula metrics For those unfamiliar with Joel Greenblatt, here is a good brief on his background from Wikipedia: In 1985, Greenblatt started a hedge fund, Gotham Capital, with $7 million, most of which was provided by "junk-bond king" Michael Milken. Robert Goldstein joined Gotham Capital in 1989. At Gotham Capital between 1985 and 1994, Greenblatt presided over an annualized return of 50% "after all expenses" but "before general partner's incentive allocation" fees; or 30%, net of all fees.) Gotham specialized in "special situations" like spinoffs and other corporate restructurings". In January 1995 Gotham returned all capital of outside partners (approximately $500 million). Joel Greenblatt was also the original funder of Dr. Michael Burry's Scion Asset Management, discovering him through his blogging activities. He is currently a professor at Benjamin Graham's alma mater, Columbia University, and runs a hedge fund called Gotham Asset Management. He has produced two investment classics, the first being You Can be a Stock Market Genius and the latter being the Little Book. The metric used in Magic Formula/Little Book investing is quite simple, it takes all the stocks in the stock market, minus banks and utility companies (since their growth is regulated) and scores them by combining their earnings yield and their return on invested capital. The two percentages are added together and a score is derived from this. The earnings yield is calculated by dividing the earnings per share by the share price. He believed the earnings yield gives a better metric than P/E as values more positive are better, while in P/E a value of smaller proportions is better when analyzing the "cheap" part of the equation. There must be two "positive is better" metrics to add together to produce ascending scores. The earnings yield is then added to the ROIC %. An example would be a stock with an EPS of $10, and a share price of $100. $10/$100= 10% earnings yield. This would then be added to the ROIC. If ROIC was also 10%, then the stock would have a total score of 20. The higher the score the better. The screener allows you to set the market cap threshold from $50 million up to infinity. I prefer to set the screener at $12 billion and up as this will screen companies that have more institutional support and ones that are most likely members of the S&P 500. September large-cap stock list The below list is the top 30 scored stocks for September with market caps over $12 billion, since the requirement is $13 Billion to enter the S&P 500, this gives me a little buffer since some of the stocks in the index drop below that market cap threshold after entering: Magic Formula Investing As we can see, both Nucor and Steel Dynamics (STLD), scored highest with Nucor edging them out slightly. This excel list is imported from Magicformulainvesting.com. The site does not give actual scores, just a list. I went through the process of calculating the scores based on earnings yield using EBIT/EV (this has been posited as the true formula the software uses, but the methodology has not been disclosed) combined with ROIC values from a well-known brokerage. If your screeners do not provide ROIC, Greenblatt advises ROA can be a good substitute. All numbers on my spreadsheet are in Billions. One anomaly I had to revise was the ROIC of Hewlett Packard (HPQ), it is consistently showing an ROIC of more than 100% on several websites and the mentioned brokerage. Therefore I deferred to ROA instead. With the current way Hewlett Packard is reporting ROIC, it is screening as the highest total score in the entire stock market. Nucor and steel sector performance With both Nucor and Steel Dynamics both clocking a TTM ROIC of 38%, this is an industry that is clicking on all cylinders. The China construction slowdown has been happening for some time, without much in the way of earnings revisions for Nucor. Can the party last? Is Nucor's business resilient enough to operate at these profit levels going into a recession? Nucor against peers (seeking alpha) In addition to the high magic formula non GAAP adjusted score for Nucor of 76.9, we can also see the business is trading at a discount to sector valuations across the board. This is not because the stock has cratered, but because their earnings and sales are just that much better. One of the big benefits for Nucor came when steel mill utilization fell during COVID and Nucor was able to increase capacity to meet demand, absorbing more business. Nucor is a beneficiary of using a large supply of scrap metal for their steel feedstock, reducing exposure to overall steel input price fluctuations and inventory write-downs that occur if the feedstock is held in excess when prices drop. The company's furnaces are mainly electric arc, providing some cost benefit to the company versus blast furnaces utilizing expensive petroleum inputs. The company's main competition are: steel industry (CFRA) Advantages and net zero steel Econiq is a catalyst for Nucor that CEO Leon Topalian says will put them over the top versus its competitors. The product is described as follows from Nucor's Econiq product page: Econiq is the world's first net-zero steel at scale, produced by Nucor. Econiq is not a single product; it is a net-zero certification, which can be applied to any product from Nucor's steel mills. I must say this product intrigues me the most from Topalian's on-air and conference call comments. Nucor is a first mover in steel trying to create a green product to obtain tax credits. This could put an entirely new spin on the boom and bust nature of the steel business if subsidization of efficient production could be obtained. In 2020 and 2021, we entered into three Virtual Power Purchase Agreements ("VPPAs"). Under each VPPAs, we have agreed to purchase for a fixed price a portion of the output of both solar and wind renewable power projects being developed in the United States. The VPPAs will be settled financially on a monthly basis. We have undertaken these initiatives to support the ongoing transition of the U.S. power grid to a greater reliance on renewable power. As part of these arrangements, we will also receive Renewable Energy Credits ("RECs") commensurate with the power we purchase. These RECs can be applied against a portion of our GHG emissions, enabling us to receive credit for reducing them. The pay fixed, received floating nature of this arrangement also offsets a portion of our exposure to higher prices for electricity over the life of the contract. We are evaluating and considering similar transactions. One VPPA started delivering RECs to us in June 2021 and the other two VPPAs may be delayed as a result of supply chain disruptions and permitting delays and interconnection delays. - Nucor 2021 10-K Nucor could be falling into the perfect storm. They've prepared to make many of their operations electric, in part powered through renewable energy. All the while the cost of petroleum products to stoke blast furnaces has risen around the world. If this works, they might even start realizing cost advantages over foreign counterparts in less environmentally regulated countries. Sales segments Nucor sales segments (Nucor 10 K ) Here we can see Service Centers make up the largest proportion of their sales followed by construction. CEO Leon Topalian has expressed the importance of organic growth and the continuance of Nucor to reinvest in the business and grow it even in the face of a recession. New sheet mills are planned in West Virginia by 2023-24. While construction and service center revenues may take a hit in a prolonged recession, Topalian has indicated strong demand from Automotive and energy-related segments, where they provide large anchor plates for wind turbines and will receive credits for energy and net zero steel. Industrial, non office/ residential construction should remain resilient as well. yahoo finance







Sep 28

Agnico Eagle: A Smart Move To Boost The Pipeline

Summary Agnico Eagle Mines is down more than 50% from its highs, a decline that is completely detached from fundamentals. This is because the company has one of the best track records sector-wide, already has an incredible portfolio of assets, and has now added three of the best mines globally. The most recent move by Agnico might have caught some off guard, but it looks brilliant, adding exposure to an extremely high-margin project in a very friendly mining state. Given the extreme valuation disconnect, I have continued to add to my position on weakness, and I see AEM as a Strong Buy below $40.00. It was the best of times. It was the worst of times. This is consistent with what investors have experienced in the general market, coming off a euphoric 100% plus rally in 18 months with a sudden descent into an unforgiving cyclical bear market. For the Gold Miners Index (GDX), it was the worst of times of 2021, it was an even worse time in 2022, and Q3 2022 has been so ugly that it's led most investors to give up all hope. Sentiment for gold is in the dumps, and sentiment for miners in the incinerator. In fact, the GDX has slid 47% in five months, an annualized decline of (-) 78%. This would place it near zero if this persists for another six months, something that many investors might actually be starting to believe is possible given how disgusted they've become with the space. Admittedly, some of the declines across the sector are justified, with several producers becoming un-investable and others mismanaging projects so poorly that they've diluted shareholders by criminal levels. However, in the case of Agnico Eagle Mines Limited (AEM), the company posted blowout results in H1 2022. It is ahead of plans on synergies and reported a massive increase in reserves at what could be a million-ounce per annum mine. Meanwhile, it has a track record that most can't match, going from a one-mine company to an eleven-mine company in 16 years with very modest dilution, with an additional three mines in the wings. Given the extreme valuation disconnect (~7.0x cash flow) for a business with peer-leading margins, organic growth, and jurisdictional risk, I see AEM as a Strong Buy below $40.00. Canadian Malartic Mine (Company Presentation) San Nicolás Partnership With Teck Agnico Eagle announced last week that it would be partnering with Teck Resources (TECK) on its advanced-stage San Nicolás Project in southeast Zacatecas in Mexico, ~250 kilometers south of Penasquito, and arguably the most attractive mining jurisdiction in Mexico. San Nicolás was discovered by Teck in 1997 and is one of the most significant undeveloped volcanic-hosted massive sulfide deposits globally. Historically, VHMS deposits have contributed significantly to the world's zinc, copper, and leader production. Notably, this is a project Teck has spent considerable time on. Agnico also has dedicated lots of time to it, having conducted dozens of site visits and looking at the project for three years before making this deal. San Nicolás Mineralization (Teck Resources Presentation) Some investors might wonder why Agnico would veer away from a gold focus toward a potential open-pit copper-zinc project with gold/silver by-product credits. The answer should be quite simple when looking at the economics and the partnership. In the case of San Nicolás, this project is well advanced, with Teck having completed a Pre-Feasibility Study in Q1 2021 and an Environmental Impact Assessment ((EIA)) in Q3 2021, and it boasts a very long mine life in a jurisdiction where Agnico has a long history of success with Pinos Altos and La India in Mexico. Digging into the economics and resource, the project is home to 105.2 million tonnes of reserves at a 1.12% copper grade, 1.48% zinc grade, 0.40 gram per tonne gold grade, and 22 gram per tonne silver grade, of ~2.0% copper-equivalent. The project is expected to produce copper and zinc in concentrate if developed and will produce 63,000 tonnes of copper, 147,000 tonnes of zinc, 31,000 ounces of gold, and a silver contribution, or approximately ~125,000 copper equivalent tonnes. Given the extremely high margins of (-) $0.16/lb copper or $0.44/lb over the mine life and reasonable capex (~$1.0 billion), the project has a 33% after-tax IRR even at conservative metals prices ($3.50/lb copper and $1.15/lb zinc). San Nicolás Project Economics - Pre-Feasibility Study (Teck Resources Presentation) Although some investors may not like this added exposure to copper/zinc, I think the move is brilliant, especially the way it was done with a shared approach. Besides, Agnico has confirmed that it is not abandoning its gold-focused strategy but that this was a unique opportunity given the exceptional economics and long mine life in a jurisdiction where it's already present. Besides, whether one prefers solely gold or not, one cannot deny the attractive supply/demand picture for copper, with a sharp rise in demand due to the trend towards electrification and declining grades and declining production due to lower head grades, long build times, and the fact that most projects need at least $4.25/lb to be worth building given their high capex. Copper Supply/Demand Picture (Wood Mackenzie Research) In terms of the deal, Agnico Eagle has subscribed for 50% of the project for $290 million, or $580 million when including its first half of project costs. Teck will benefit from Agnico's mine-building and operating experience in Mexico while Agnico will benefit from Teck's base metals expertise and marketing leadership. Given the relatively modest capex on a shared basis (~$500 million) and sharing the project, this does not disrupt Agnico's capital allocation plans (dividend & buyback plus aggressive portfolio-wide exploration), nor does it disrupt its organic growth plans. Like most deals in the sector, each one draws criticism. However, I see this deal as a great move, given that it is not easy to find projects with these economics in the gold sector. This project offers high single-digit production growth attributable to Agnico on a gold-equivalent basis at Fosterville-like cash cost margins over 15+ years. In fact, on an attributable basis over the mine life, the cash cost margins would be over 80%, equivalent to producing gold at cash costs of less than $250/oz (Agnico's current cash costs are ~$800/oz). Agnico Eagle Mines - Current Production & Forward Production Potential (Company Filings, Author's Estimates & Chart) Based on the current schedule, the hope is to see the first production in 2026, with the first full year of commercial production likely to be in 2027. The contribution from San Nicolás is shown in the bar's blue/white gradient area, and contribution from this asset, combined with growth at Macassa/Amalgamated Kirkland (#4 Shaft) and Hope Bay coming back online, could push Agnico's production to ~3.9 million ounces in 2027. Assuming the company can add additional ounces in the Kirkland Lake Camp (Upper Beaver, existing Holt Mill, Upper Canada) and leverage off existing infrastructure in the area, there's a path to ~4.0 million ounces by 2028 potentially. Just as importantly, this project will pull down consolidated costs for Agnico at a time when many other producers are struggling to keep costs below $1,275/oz, with Agnico potentially having paved a path to maintain sub $1,000/oz costs. I believe this makes Agnico Eagle stand out relative to its peer group, with up to 20% production growth this decade at lower costs, as it benefits from lower unit costs due to economies of scale at Macassa, higher throughput at Detour, and the possibility of lower costs due to by-product credits at Upper Beaver, in addition to San Nicolás. If we look elsewhere among the 3.0+ million-ounce producers, it's much harder to find growth, meaning Agnico is a nice combination of growth & value, which we'll discuss later. Kirkland Lake Camp - A New Complex (Company Presentation) Overall, I see this deal as very positive, given that it is consistent with Agnico's risk-averse growth strategy and ensures it doesn't pay for growth at any price as some other producers have in the past couple of years. In fact, this deal is a very nice deviation from the deals we saw in the past cycle for gold in the 2007-2012 period, which were major acquisitions done near the top of the cycle with massive capex bills, and high prices paid. In many cases, these projects required high metal price assumptions to work. In the case of San Nicolás, this project works even at $2.75/lb copper, given its margins, with five times the copper-equivalent grade of other development projects globally. So, when it comes to marrying the strengths of both companies and sharing the capex risk, I think this is a model that could be embraced by the market. It allows the companies to add growth in a period of extreme pessimism without any share dilution and with limited risk due to partnering. Hence, I think this was an A+ deal by Agnico Eagle, even if it's something I would never have expected. A Long-Term Track Record Worth Betting On If we look at the charts below, we can see that Agnico Eagle has arguably the best track record sector-wide among its peers, growing from one mine in 2005 (LaRonde) to 11 mines today without sacrificing on jurisdictional risk and with relatively low share dilution. This is evidenced by the fact that Agnico Eagle has grown production from ~271,000 ounces in 2004 to ~3.30 million ounces in 2022 (1100% growth), while its share count has increased from just ~86.0 million shares to 455 million shares. The result is an industry-leading production growth per share rate, and if a company is not growing production per share, it is better to hold the physical metal itself. However, it's important to note that this growth from 0.022 ounces of gold production per share held in 2005 to 0.074 ounces in 2022 does not do this figure justice. The reason is that Agnico has another 1.0+ million ounces bought and paid for within its portfolio without the need for any additional share dilution, suggesting significant further production per share growth on deck. In fact, production growth per share could accelerate, with the company recently approving opportunistic share buybacks as a new tool to return capital. The 1.0+ million ounces of growth in the tank is related to organic growth at Detour Lake, Meliadine, and Macassa/AK, as well as Hope Bay (permitted, pat producer, infrastructure in place), Upper Beaver (advanced-stage, benefits from regional infrastructure), Santa Gertrudis (low-capex growth), and San Nicolás (advanced stage, now shared with Teck). Agnico Eagle Mines - Shares Outstanding & Gold Production + Forward Estimates (Company Filings, Author's Chart) Agnico Eagle - Production Growth Per Share, Dividend Per Share, Shares Outstanding (Company Filings, Author's Chart) Digging into the second chart, we can see that while Agnico's production growth per share has been phenomenal, its dividend growth rate has rivaled that of Dividend Champions, which is especially impressive for a stock in a cyclical industry. The company's annualized dividend has grown from $0.03 per share in 2004 to $1.60 in FY2022, a ~24% compound annual growth rate that is in line with Apple (AAPL) and only just behind that of Starbucks (SBUX) since they began paying dividends in 2010 and 2012, respectively. In fact, Agnico has consistently paid a dividend since 1983 and is a clear outlier in the sector. Finally, it's important to note that Agnico Eagle has been very disciplined when it comes to allocating capital. While its share count grew quite rapidly during its high-growth phase, it made very modest bets in early-stage stories to build itself into the company it is today. These bets have paid off multiple times over, with approximately ~$3.0 billion spent on acquisitions (Riddarhyttan (Kittila), Pinos Altos, Cumberland (Meadowbank), Meliadine, Grayd (La India), Malartic (50%), Upper Beaver/Hammond Reef). Many of these assets have already been in production for nearly a decade and have generated considerable free cash flow, and sporting a combined estimated net asset value of more than $8.5 billion.

Sep 28

U.S. Steel: The Bust Opportunity Has Not Arrived

Summary The threat of a severe recession has continued to send U.S. Steel sliding further from its August highs, even though the company posted a remarkable Q2. We discuss why investors need to expect more pain, given U.S. Steel's highly cyclical business model. Investors need to ask whether the Street has priced in significant earnings compression for U.S. Steel through the cycle. Our analysis could surprise you. Thus, investors should wait patiently for the "bust" opportunity to arrive before considering adding exposure. We discuss the valuation and price levels that investors should watch to assess such an opportunity. Thesis We present a timely update to our previous article on United States Steel (X) as worsening economic headwinds have accelerated. The Fed's hawkish stance in accelerating its rate hikes has increased fears that it could bring the economy to its knees, driving it into a hard landing in 2023. As a result, we believe the market has been pricing in these headwinds accordingly into economically sensitive stocks like X, given their highly cyclical business model. It's critical for investors to assess whether the recent pullback from its August highs warrants adding more positions as X goes through the cycle. Our analysis suggests it's still too early to add more exposure, as we have not yet gleaned significant earnings compression in the consensus estimates. Notwithstanding, the market has already started anticipating further cuts, as it justifiably de-rated X, despite a remarkable Q2. Investors need to note that the market is forward-looking. We discuss why we are not ready to re-rate X yet. We also discuss the critical price and valuation levels that investors can start getting excited with X subsequently to ride the next wave up. As such, we reiterate our Hold rating. Prepare For A Major Recession Even though the equity markets are already in the doldrums, we think Fed Chair Jerome Powell and his committee are sparing no effort to inflict more pain on the economy with their #1 goal of bringing down inflation expeditiously. Therefore, we believe the market remains in a price discovery phase as investors battle to assess whether Powell's objective could lead to a soft or hard landing for the economy. Famed Wharton professor Jeremy Siegel accentuated that the Fed is making yet another policy stumble that could cause a severe recession in 2023. He articulated: Now when all those very same commodities and asset prices are going down, [Powell] says: 'Stubborn inflation that requires the Fed to stay tight all the way through 2023.' It makes absolutely no sense to me whatsoever, way too tight. If tightening actions from the Fed continue through 2023, you can make sure that there's a major recession on the other side. - Insider Notwithstanding, Princeton economics professor Alan S. Blinder highlighted in a recent commentary that it's not all doom and gloom, and we shouldn't write off the Fed yet. He stressed in a recent commentary that "landing the economy softly is a tall order, but success is not unthinkable. The Fed has done it before." Blinder articulated: A careful historical analysis suggests, however, that the Fed has a much more encouraging record. By my reckoning, it managed a soft landing or came close in six of the 11 cases. In the other five, it was either not trying to land the economy softly-because a hard landing was needed to crush high inflation-or its policy was overwhelmed by events out of the Fed's control. - WSJ Therefore, we believe the price discovery in the market leading to volatility will likely continue as the bulls and bears battle their conviction. Undoubtedly, the initiative remains with the sellers, betting that Powell and his team will unlikely achieve a soft landing, given the malaise in the equity markets. So, Prepare For U.S. Steel's Earnings Compression U.S. Steel Revenue change % consensus estimates (S&P Cap IQ) Interestingly, the consensus estimates (neutral) suggest that X's revenue growth should slide further through 2023 before recovering. Therefore, the Street could already have priced in a significant downturn in U.S. Steel's growth momentum. U.S. Steel Adjusted EBITDA margins % and FCF margins % consensus estimates (S&P Cap IQ) However, the Street is still projecting for U.S. Steel to post adjusted EBITDA margins that are way higher than its previous significant downturns in 2016 and 2020.







Sep 12

Southern Copper: A Weak Copper Outlook Is Not Helping

Summary Southern Copper's earnings per diluted share were $0.56 per share, and revenues were $2.307 billion. A weak production quarter due to the 53-day disruption in the Cuajone mine in Peru. Copper Production for 2Q22 was 459.5 Cu M lbs and 520.5 Cu M lbs, including third party (sold 430.8 M lbs), down 12.1% from the same quarter a year ago. I recommend buying SCCO at or below $44.5 with potential lower support at $43.6. Introduction The Phoenix-based Southern Copper Corporation (NYSE:SCCO) is a majority-owned, indirect subsidiary of Grupo Mexico SAB de CV (OTCPK:GMBXF). As of June 30, 2022, Grupo Mexico, through its wholly-owned subsidiary Americas Mining Corp ("AMC"), owns 88.91% of its capital stock. SCCO Diagram Presentation (SCCO Presentation) The company is an integrated producer of copper, representing about 80% of the revenue, and other metals (mainly molybdenum, silver, and zinc). Note: This article is an update of my article published on July 24, 2022. I have followed SCCO on Seeking Alpha since January 2021. The company operates mining, smelting, and refining facilities in Peru and Mexico (See picture below). Southern Copper also conducts exploration activities in Argentina, Chile, and Ecuador. From the most recent company's presentation. SCCO Presentation (Southern Copper) 1 - Summary On July 26, 2022, SCCO reported second-quarter 2022 earnings of $0.56 per share on a net sale of $2,306.9 million, missing analysts' expectations. Revenues were down 20.4% from the prior-year quarter. The quarterly results were affected by a 25,624-tonne decrease in copper production at the company's Peruvian operations (stoppage at Cuajone and lower ore grades) and a decline in ore grades at both Toquepala and La Caridad operations. The copper production losses were temporarily offset with purchases from third parties, albeit at a higher cost, to avoid a force majeure event. Molybdenum production fell 9.7% compared to 2Q21; silver dropped 4.4%, and Copper 12.1%. Cash flow from operating activities in 2Q22 was $309.9 million, representing a decrease of 70.8% over the $1,061.5 million posted in 2Q21. An essential element to consider: Southern Copper owns the world's largest copper reserves at 42.4 MMT. SCCO Copper reserves (Southern Copper) 2 - Stock performance Southern Copper is the second copper company I am covering at Seeking Alpha after Freeport-McMoRan (FCX). Both companies have dropped significantly since April due to a significant drop in the copper price and lingering fear of recession due to the Fed's action. Data by YCharts SCCO has underperformed Freeport-McMoRan and the Global X Copper Miners ETF (COPX), with a loss of 20% in one year. 3 - Investment Thesis My two reliable stocks in the copper sector are Freeport-McMoRan and Southern Copper. I consider these two companies very solid in terms of balance sheets which pay generous dividends despite a weakening copper price. The outlook for copper is uncertain at the moment, and the copper price has dropped significantly in the past few months with no real catalyst in the near term. 1-Year copper price chart (Kitco.com) Decades-high inflation has pushed the Fed to turn very hawkish, ultimately pushing the world economy into recession. The Fed is expected to hike interest by 75-point for the third time on September 22. The Chairman of the Board, German Larrea, said in the press release: We believe the economic slowdowns in the U.S., China and Europe have temporarily weakened the demand for copper and are driving reductions in current prices. It is important to emphasize that copper plays a leading role in the global shift to clean energy, which correlates positively with our assertion that the underlying demand for copper will be strong in the long-term. One major issue for Southern Copper is its presence in Peru and principally the 54-day disruption it experienced with the Cuajone mines, which were partially resolved on May 3, 2022. Also, the ore grades decreased sharply at both Toquepala and La Caridad mines. The company expects the disruption at Cuajone to drag down annual copper production to 922,000 tons. Output is set to recover to 971,000 tons next year, Southern Copper Chief Financial Officer Raul Jacob said Tuesday on a call with analysts. Finally, I noticed increasing inflationary pressures that could reduce the future free cash flow. Thus, I believe long-term investors should continue accumulating this highly cyclical stock on any significant weakness. But, due to extreme volatility in the copper demand, I recommend short-term trading LIFO. About 30% to 40% should be allocated for this task to minimize the risks of a sudden severe retracement. Southern Copper - 2Q22 - Balance Sheet and Trend - The Raw Numbers Southern Copper 2Q21 3Q21 4Q21 1Q22 2Q22 Total Revenues in $ Million 2,897.0 2,680.9 2,823.7 2,763.8 2,306.9 Net income in $ Million 932.7 867.6 832.9 784.7 432.3 EBITDA $ Million 1,863.7 1,710.8 1,728.5 1,683.0 1,025.7 EPS diluted in $/share 1.21 1.12 1.08 1.02 0.56 Cash from Operations in $ Million 1,061.5 1,220.6 1,227.7 820.7 309.9 Capital Expenditure in $ Million 219.8 243.1 196.8 205.2 224.6 Free Cash Flow in $ Million 841.7 977.5 1,030.9 615.5 85.3 Total cash $ Million 2,940.1 3,210.5 3,488.9 3,253.7 2,355.7 Total Long term Debt in $ Million 6.545.9 6,546.7 6,547.6 6,548.5 6.549.4 Dividend $/sh 0.90 1.00 1.00 1.25 0.75 Shares outstanding (diluted) in Million 773.1 773.1 773.1 773.1 773.1 Source: Southern Copper release Note: More data (production) is available for subscribers. Analysis: Revenues, Free Cash Flow, and Copper/Silver/Molybdenum Production 1 - Revenues were $2,306.9 million for the second quarter of 2022 SCCO Quarterly Revenues history (Fun Trading) Southern Copper's earnings per diluted share were $0.56 per share, and revenues were $2.307 billion. 2Q22 net income was $432.3 million, representing a 53.7% decrease compared to the $932.7 million in 2Q21. The adjusted EBITDA dropped 45.2% year over year to $1,021.4 million in the second quarter of 2022. The adjusted EBITDA margin in 2Q22 stood at 44.3% versus 64.3% in 2Q21 2 - Free cash flow was $85.3 million in the second quarter of 2022 SCCO Quarterly Free cash flow history (Fun Trading) Note: I calculate the generic free cash flow using the cash from operating activities minus CapEx. Trailing 12-month free cash flow was $2,709.2 million, with $85.3 million in 2Q22. The company declared a quarterly dividend of $0.75 per share in 2Q22, or a yield of 6.10%, supported by the free cash flow generation. 3 - Net debt was $4.19 billion on June 30, 2022 SCCO Quarterly Cash versus Debt history (Fun Trading) On June 30, 2022, SCCO had $2.36 billion in consolidated cash and long-term debt of $6.55 billion. The net debt to EBITDA is now 0.7x, which is good. 4 - Production analysis - Copper-Cu, Silver-Ag, and Molybdenum-Mo. Note: The weight in metric tons is equal to 2,205 pounds Price 2Q21 3Q21 4Q21 1Q22 2Q22 Copper price realized - Cu (Comex) $/Lbs 4.40 4.25 4.40 4.53 4.32 Silver price Realized - Ag $/oz 26.78 24.28 23.36 24.05 22.65 Molybdenum price realized - Mo $/Lbs 13.89 18.43 18.53 18.99 18.30 Zinc price $/Lbs 1.32 1.36 1.53 1.70 1.78 Gold $/oz 1,816 1,789 1,795 1,874 1,872

Aug 15

MP Materials: Prices For Rare Earths Are Tumbling

Prices for rare earths are pulling back from their peak. This comes as MP Materials reported fiscal 2022 second quarter earnings that saw net income nearly tripling. The rest of fiscal 2022 will be strong due to favourable year-over-year neodymium comps but 2023 will be more challenging. MP Materials (MP) has been having an incredible year. The company just released revenue figures for its fiscal 2022 second quarter which jumped by nearly 100% as net income nearly tripled. The high realized prices for rare earth oxides continued to provide a boom for the US-based miner which now lies at the centre of plans by the US government to reduce dependency on China for the elements. This need was heightened with Chinese sabre-rattling around Taiwan which at the core exposed the clash of geopolitical objectives of both economies. We saw China exploit its dominance of the sector back in 2010 when it banned exports to Japan following a collision between a Chinese fishing boat and a Japanese coast guard vessel around the disputed Senkaku Islands. Rare earths are essential for a wide spectrum of technologies including generators for wind turbines, traction motors for electric vehicles, medical devices, fighter jets, and missiles. These industries are being placed at the sacrificial altar if the situation around the Taiwan strait was ever to turn hot. The strong earnings results also came in against the passing of The Inflation Reduction Act, one of the most significant climate-focused bills in US history. The bill allocates $370 billion over 10 years to decarbonization initiatives that are set to supercharge the rollout of wind energy and EVs in the United States. During the recent earnings call, management stated that the bill, when signed into law, will be fantastic for their supply chain as it provides a material benefit through its 10% production tax credit for critical material processing. Critically, it's an unprecedented level of government intervention which accelerates the immediate macro drivers for MP Materials. It will bring forward demand and the inherent supply deficit MP Materials states exist for rare earths. Neodymium Prices Retreat From All-Time Highs This should not necessarily be news for shareholders, but neodymium prices have been falling. This is part of a wider pullback in commodities, from oil to copper to wheat, as speculative froth initially driven by commodity traders and hedge funds continue to be stripped back. However, MP Materials has stated they expect a constricted global supply chain for rare earths with the still limited number of global suppliers maintaining the supply deficit in the years ahead. This should continue to support profitability and positive cash flows in the coming quarters, but would face a problem in 2023 when year-over-year comps will likely show a decline in a broad range of financial metrics. Trading Economics MP Materials will see variability in earnings, that's a natural consequence of being a miner where the economic cycle influences prices. The immediate macro drivers for rare earths are likely to continue to post strong growth even if the economy falls into a recession. This is a scenario made even more likely by the Inflation Reduction Act. Further, as MP Materials is moving to develop a permanent magnet facility in Ft. Worth, Texas, the company stands to improve its profitability by moving beyond just mining REOs. The facility will source refined feedstock from Mountain Pass to transform it into finished magnets, delivering an end-to-end rare earths supply chain within the US.