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U.S. Materials Sector Analysis

UpdatedOct 01, 2022
DataAggregated Company Financials
  • 7D-0.5%
  • 3M-7.8%
  • 1Y-16.5%
  • YTD-23.6%

The Materials is pretty flat in the last 7 days, but Agnico Eagle Mines has stood out, gaining 8.1%. Unfortunately though, the industry is down 16% over the past 12 months. Looking forward, earnings are forecast to grow by 5.1% annually.

Sector Valuation and Performance

Has the U.S. Materials Sector valuation changed over the past few years?

DateMarket CapRevenueEarningsPEAbsolute PEPS
Sat, 01 Oct 2022US$1.1tUS$954.6bUS$102.8b9.9x11.2x1.2x
Mon, 29 Aug 2022US$1.3tUS$954.5bUS$102.9b11.9x12.9x1.4x
Wed, 27 Jul 2022US$1.3tUS$920.1bUS$99.8b12.8x12.7x1.4x
Fri, 24 Jun 2022US$1.2tUS$895.8bUS$97.3b11.9x12.6x1.4x
Sun, 22 May 2022US$1.4tUS$895.0bUS$97.3b13x14.2x1.5x
Tue, 19 Apr 2022US$1.5tUS$841.4bUS$84.5b17.2x18x1.8x
Thu, 17 Mar 2022US$1.4tUS$849.7bUS$87.1b16.1x16.5x1.7x
Sat, 12 Feb 2022US$1.4tUS$824.8bUS$83.6b17.6x16.9x1.7x
Mon, 10 Jan 2022US$1.5tUS$800.6bUS$79.0b18.4x18.7x1.8x
Wed, 08 Dec 2021US$1.4tUS$796.1bUS$78.7b18.6x18.1x1.8x
Fri, 05 Nov 2021US$1.5tUS$790.5bUS$75.7b17.9x19.2x1.8x
Sun, 03 Oct 2021US$1.3tUS$726.6bUS$59.0b17.7x22.9x1.9x
Tue, 31 Aug 2021US$1.4tUS$724.0bUS$59.4b17.9x24x2x
Wed, 07 Jul 2021US$1.4tUS$717.3bUS$58.1b19.2x23.9x1.9x
Sat, 10 Apr 2021US$1.3tUS$653.3bUS$35.8b20.8x37.3x2x
Fri, 01 Jan 2021US$1.2tUS$623.8bUS$25.3b21.1x47x1.9x
Mon, 05 Oct 2020US$1.0tUS$612.7bUS$15.1b19.6x66.5x1.6x
Thu, 09 Jul 2020US$894.0bUS$617.7bUS$19.4b17.2x46x1.4x
Wed, 01 Apr 2020US$709.4bUS$640.2bUS$25.5b11.6x27.9x1.1x
Sat, 04 Jan 2020US$1.0tUS$650.3bUS$28.9b15.2x34.8x1.5x
Tue, 08 Oct 2019US$944.3bUS$658.7bUS$38.5b15.7x24.5x1.4x
Price to Earnings Ratio


Total Market Cap: US$944.3bTotal Earnings: US$38.5bTotal Revenue: US$658.7bTotal Market Cap vs Earnings and Revenue0%0%0%
U.S. Materials Sector Price to Earnings3Y Average 32.1x202020212022
Current Industry PE
  • Investors are pessimistic on the American Materials 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 11.2x which is lower than its 3-year average PE of 32.1x.
  • The 3-year average PS ratio of 1.7x is higher than the industry's current PS ratio of 1.2x.
Past Earnings Growth
  • The earnings for companies in the Materials industry have grown 39% per year over the last three years.
  • Revenues for these companies have grown 13% 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 sector?

US Market-2.48%
Metals and Mining1.83%
Basic Materials0.79%
Paper and Forestry Products-0.23%
Industry PE
  • Investors are most optimistic about the Basic Materials industry even though it's trading below its 3-year average PE ratio of 26.4x.
    • Analysts are expecting annual earnings growth of 13.3%, which is higher than its past year's earnings decline of 3.2% per year.
  • Investors are most pessimistic about the Paper and Forestry Products industry, which is trading below its 3-year average of 10.0x.
Forecasted Growth
  • Analysts are most optimistic on the Basic Materials industry, expecting annual earnings growth of 13% over the next 5 years.
  • This is better than its past earnings decline of 3.2% per year.
  • In contrast, the Paper and Forestry Products industry is expected to see its earnings decline by 28% 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%
LYB LyondellBasell IndustriesUS$75.283.0%
NEM NewmontUS$42.031.9%
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Latest News







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

Ginkgo Bioworks: Promising Upside But Not Without Risks

Summary The company has a near-term revenue driver in the form of the Joyn Bio deal and the fertilizer shortage. On the financial side, the balance sheet is in superb form given the stage of the company's development. All-in-all, the company is very well positioned to have explosive growth during an economic winter. Ginkgo Bioworks (DNA) specializes in discovering molecules, processes, or strains with commercial value. That also includes engineering organisms to create customer value. In other words, Ginkgo is a biology engineering company. The company wants to build a platform for cell programming. The simplified idea is that cells are the printers of the physical world, capable of manipulating atoms. The company designs cell programs to generate outputs of biological products like therapy molecules, food ingredients, and chemicals. The advantage is the ability to scale to a level where it becomes cost competitive to produce through biology. For instance, there are petroleum-derived chemicals that the industry might replace through cell organisms programmed by Ginkgo. The potential of this technology is amazing. It is possible to engineer microbes to fixate Nitrogen in plants' roots, thus decreasing the need for artificial fertilizers. Or, we can even produce Hydrogen from microbes, which is more promising than energy-intensive electrolysis. The applications are endless. For instance, the biosecurity line of business skyrocketed in 2021. Most of this is thanks to the Covid virus and the need for passive monitoring of wastewater and air. Ginkgo Bioworks Ginkgo's revenue spurt is impressive. However, I believe that it won't be the last we'll see. Why am I so optimistic? Well, the company seems to be in a position to rapidly take advantage of global problems by offering engineered solutions for them. DNA engineering might be the solution to a lot of our energy problems. The twentieth century marked our control over chemical reactions of existing rich energy resources, similarly, the twenty-first century might witness the start of our control over biology to replenish our energy resources. Microbes engineered to enhance hydrogen production might be the viable way to produce hydrogen instead of water electrolysis. Ginkgo's platform So, what is the advantage of Ginkgo? Its platform. Ok, I guess you keep hearing this argument many times but let's do a deep dive on this one. Two assets are the foundation of the company's platform: Foundry and Codebase. The Foundry is where the company designs, writes, and inserts the DNA into the cells. Foundry includes software and automation tools used in this engineering process, facilitating testing and iterating. According to the management, the output has increased three times annually, while the costs have decreased by 50% per year. The codebase is the database of biological assets (cells and code) that the company is constantly growing, and it can leverage for future projects, improving the odds of success. Together these two assets should improve with scale and, in turn, drive more scale. Rationale for investing As Stanley Druckenmiller says, the market is not about what is happening now but what might happen in 18 months. In my opinion, in the next year and a half, there is a big chance of the developed world facing a shortage of food supplies due to the war ramifications. Nowadays, the largest threatened product group is nitrogen-based fertilizers. The production derives from the Haber-Bosch process, which involves mixing the nitrogen in the air with hydrogen at high temperatures and pressure to produce ammonia. The supply chain from Russia, Ukraine, and Byelorussia is already unreliable. Additionally, Polish producers are halting fertilizer production due to natural gas prices. An energy crisis coupled with a food security crisis is a recipe for disaster. I'm not very optimistic about the impact on the developed world. However, if there is hope to solve these problems, I think it must come from mastering biology. Joyn Bio, the joint venture formed between Ginkgo and Bayer to develop ag biologicals, is a good example of this pursuit. Bayer was interested in testing Ginkgo's synthetic biology capabilities in the agricultural field. One of the most interesting highlights is the nitrogen-fixing program. The joint venture dissolved in the first half of 2022, but the partnership will remain. Both companies will split the Joyn Bio assets, with Ginkgo getting research assets (IP, intellectual rights, research staff). The product concepts will go to Bayer, which will commercialize them. There are some nuances. One of them is that Ginkgo will receive royalties on Bayer's net sales of the Nitrogen-fixer program that Bayer will commercialize. Ginkgo is buying the West Sacramento research site owned by Bayer (83 million in cash or stock). In my opinion, this deal can be huge for Ginkgo. First, the company will have a solid foot in the agricultural biologicals market through Bayer. Bayer already has a retail footprint in that market, which means it has the scale to commercialize the Nitrogen-fixer program. Second, the company will be adding resources to develop other agricultural solutions, which I believe will be in demand during the following years. In my opinion, revenues coming from the ag bio business might have a huge impact in the medium term, akin to the effect of the covid vaccine on Moderna. If those royalties materialize, the company might cash in enough revenues to finance the next round of growth. Ginkgo Bioworks Company development Be as it may, the company is perceived as a biotech startup and treated as such. As you can see by comparing Ginkgo's price performance against the iShares Genomics Immunology and Healthcare ETF (IDNA), the company has underperformed the IDNA by 26% in the previous year. Seeking Alpha One interpretation is that investors see the company as a cash-burning machine in a scenario of economic winter and liquidity contraction. In my opinion, this couldn't be further from the truth. The company seems to hemorrhage cash when you look at the bottom line, but the cash flow shows a more benign situation. Ginkgo Bioworks Ginkgo Bioworks The 1.3 billion dollar loss becomes much less sensational when you check that the operating cash flow was just a loss of $120 million. The main component of the income statement loss is stock-based compensation which explains the difference between the two metrics. The result is that, unlike many other tech companies, Ginkgo has been capable of maintaining a solid balance sheet. The current ratio is more than 10, which is a good indicator that Ginkgo is in great shape to navigate the liquidity contraction. Seeking Alpha Investor Takeaway Ginkgo has a couple of underlying trends going in its favor. First, the energy constraints in Europe open an opportunity for ag bio. Second, the macro scenario is daunting at a time when most tech companies have burned through lots of reserves, but not Ginkgo. The natural gas constraints might be the catalyst for commercial adoption of the nitrogen-fixing program. That, in turn, could yield royalties to Ginkgo. The increase in revenues would come at no extra cost for the company and could significantly contribute to the company reaching the 1 billion revenue watermark. If that happens, a couple of chain reactions could get on course. First, the 21% short interest in the stock could get squeezed, sending the price to sales multiples higher. Second, the extra revenues will help the company finance the younger branches of the company's R&D.







Sep 21

CF Industries: Europe's Crisis Is This Company's Opportunity

Summary The energy crisis in Europe is forcing European fertilizer companies to halt production. This supports more North American fertilizer demand as European supply gets cut off. CF's recent insider sales are a small proportion of their tiny holdings of the company. Clearly, insiders will look to diversify their position over time. Earlier in 2022, investors bid up CF, but capital flows have now moved out. However, the fundamental case today is even stronger than at the start of 2022. Presently, CF is priced at 5x free cash flow. This low valuation leaves plenty of margin of safety for negative expected outcomes. Investment Thesis I recently made the case to DVR members that CF Industries (CF) is very well positioned for high nitrogen prices. Here's the context, with natural gas prices in Europe sky-high there's simply no way for European fertilizer producers to compete against US-based manufactured fertilizer. Even if at the start of 2022 investors came to realize that, capital flows have still pulled back and have migrated away. This has left CF priced at 5x this year's free cash flows. I lay out different scenarios to help readers think through some of the positive and negative considerations affecting this investment. Ultimately, I'm confident you'll agree, that this is a particularly interesting and exciting investment opportunity. Putting Recent Insider Sales in Context There was a big deal made on Seeking Alpha that insiders sold $18 million worth of stock. However, keep in mind that the biggest sale, $11 million worth of stock, was made by CEO Tony Will. And despite CEO Will selling such a chunk of his holding, he still has $32 million worth of CF stock. Indeed, if the CEO and others didn't sell his stock their stock from time to time, how else would they diversify their holding? Having $32 million worth of equity in a company is plenty of skin in the game. Particularly given that management will get further stock-based compensation over time. I personally don't see these equity sales in a negative light. Why CF Industries? Why Now? CF Industries produces nitrogen fertilizer products. DTNPF.com As you can see above, nitrogen prices, those of concentrated ammonium nitrate solution (''UAN'') have come down in the past few months. The reason for this is that nitrogen prices are so high relative to last year that many farmers are now working very hard to put off buying more until next year. But the reason why I'm bullish on CF is that I recognize that with energy prices so high in Europe, there's simply no way for European peers to profitably produce fertilizer. However, the demand for fertilizer hasn't gone away. It's simply that it's much cheaper for farmers to get the fertilizer from the US and ship it across rather than buy it from local farmers at exorbitant prices. This leaves North American fertilizer producers with a moat around their fundamentals, as companies elsewhere in the world don't have access to the very cheap natural gas feedstock that North American producers such as CF Industries have. Even though, it should be noted that CF Industries also has some minor exposure to Europe. A Picture Worth a Thousand Words CF Industries Q2 2022 presentation Altogether, through CF's strong free cash flow generation, together with consistent buybacks, CF Industries has been consistently reducing the total number of shares outstanding. The bars show free cash flow increasing significantly in the past two years, while the total number of shares outstanding, the green line, is coming down. That means more free cash flow per share. Along these lines, CF's management said during their Q2 2022 earnings call, Given this outlook, we expect to generate substantial free cash flow for an extended period. This will enable us to return significant capital to shareholders, while we also make disciplined investments to grow our low-carbon ammonia production footprint. CF Stock Valuation - Approximately 5x FCF The reason why CF isn't more expensive is that it's difficult to get much visibility right now into what price nitrogen will be at in 2023. Simply put, there's a lot of uncertainty in the market, and investors hate uncertainty second only to bad news. That being said, even if in 2023 prices come down around 15% to 20%, that wouldn't take away from the fact that CF is still very attractively priced. In fact, if CF Industries' free cash flow only increases slightly from $3.6 billion over its trailing twelve months, to $4 billion by year-end, this would still leave the stock priced at just 5x this year's free cash flows. Now, as noted above, this does not detract from the fact that investors right now have absolutely no visibility into 2023. That typically wouldn't be a huge problem. But given that the market is so stretched and volatile investors are probably worried that nitrogen prices could seriously sell-off.

Sep 19

International Paper: We Double Down

Summary FedEx's preliminary results were a headwind for the whole paper sector. A strong balance sheet and no sign of dividend cut with a compelling valuation support a buy rating target. Mondi's recent transaction is also supportive news for IP (with the Ilim JV). Last Friday, at the exchange's closing bell, International Paper's stock price declined more than 10%. Why? FedEx (FDX) reported its Q1 preliminary account results with a profit warning. The CEO also explained that "global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S. FedEx is swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations". In addition, as explained here, Jefferies analyst shifted IP's rating from neutral to sell (from $40 to $31 per share). This was due to 1) a softer containerboard demand, 2) inventory de-stocking for the inflationary pressure environment, 3) expected selling price cut and 4) not a positive outlook for 2023. For two years, here at the Lab, we have covered International Paper (IP) and so far, it has been a long and enjoyable ride. After analyzing IP's Russian exposure and its Q1 performance, we upgraded (once again) the company to buy. International Paper's Stock Price Evolution (last 5 days) (Yahoo Finance) Our internal team is still confident in IP's potential capital upside, so we are benefiting from this recent price decline to double down our investment size. Why Are We Still Positive? Looking at the details of Jefferies' sell rating, they claimed that "orders have fallen off starting in July and have persisted through (September) as customers and containerboard manufacturers work through excess inventory".

Sep 13

Albemarle: World's Largest Lithium Producer Faces Material Demand As Decarbonization Becomes Gospel

Summary Albemarle's revenue has gone parabolic on the back of material lithium demand. This is being driven by the global effort to reach net zero. Governments around the world are increasingly instituting dates to phase out sales of fossil fuel vehicles. The Inflation Reduction Act is set to compound this demand and open up a new era of unrestrained runaway growth for Albermarle's core business. Charlotte-based Albemarle (NYSE:ALB) is the world's largest lithium producer, mainly supplying the growing demand for electric vehicles. The company, founded in 1887, also produces Bromine and Catalyst solutions. The former serves a number of use cases from agricultural chemicals, pharmaceuticals, and flame retardants. Lithium by far forms the most pertinent bull case for Albemarle and the key driver of investor interest in the company. The chemical element is used as the key ingredient for lithium-ion batteries, the principal battery chemistry for electric vehicles. This places Albemarle at the front of the decarbonization of transport, once a fringe request by environmentalists at the turn of the new millennia but now core policy objectives for some of the world's largest economies. On the back of 2021's United Nations Climate Change Conference was the Glasgow Declaration. It commits signatories to ensure sales of all new cars and vans to be zero emission by 2035. Hence, the list of states and countries on a planned phase-out of combustion engine vehicles has grown significantly. This is not a list of minnows. California, the European Union, the United Kingdom, Japan, and South Korea all feature on the now rapidly growing list that is expanding Albemarle's total addressable market. The long-term outlook for EVs is strong. Global sales of EVs reached 6.6 million in 2021, more than double its year-ago figure. Highlighting just how staggering growth has been, just 120,000 EVs were sold globally in 2012. Last year saw that figure being sold in a week with 10% of cars sold in 2021 being electric, 4x the market share in 2019. Growth is fast becoming exponential, albeit partially slowed down as a result of the current weakening macroeconomic environment. Revenue Goes Parabolic As Demand For Lithium Carbonate Goes Beyond Point Of No Return The company last reported earnings for its fiscal 2022 second quarter which saw revenue come in at $1.48 billion, a 91.2% increase over its year-ago period and a marginal beat of $622,520 on consensus estimates. Whilst there was healthy growth across all its divisions with Bromine and Catalysts sales jumping by 35% and 42%, respectively, net lithium sales surged by 178% to reach $891.5 million during the quarter. This constituted 60% of total revenue and was driven by higher pricing as well as an increase in sales volumes. ALB Revenue (Quarterly) data by YCharts Whilst net income fell to $406.8 million from $424.6 million in the year-ago quarter, adjusted EBITDA grew by 214% year-over-year to reach $610 million with margins at 41%. Albemarle Further, whilst cash flow from operations was negative at $145.87 million, the company now expects to be cash flow positive this year with approximately $150 million in positive free cash flow expected at the midpoint of their guidance. For the year, Albemarle expects adjusted EBITDA will rise by at least 500% as average realized pricing is expected to increase by at least 225%. Full-year volume sold is expected to rise by at least 25% at its midpoint as the company continues to invest in new capacity to meet demand. Several projects are underway in China and a number are in the early stages of planning for the US. The recently signed Inflation Reduction Act which allocates $370 billion over 10 years for decarbonization is set to drive even greater demand for lithium over current baseline projections. Critically, the Act will see greater demand pull for lithium for utility-scale lithium-ion battery storage as renewable energy is set to undergo a generational boom. Solar and wind are expected to rise to a forecasted 80% of electricity production by the end of the decade, up from around 20% of production currently.

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