The prospects of the Zacks
Mining – Non Ferrous
industry look bleak as apprehensions about slowing demand and economic activity have been weighing down commodity prices. Additionally, the industry players are grappling with inflated input costs, particularly energy as well as labor shortages and supply-chain issues.
Against this backdrop, we suggest keeping a close eye on companies like
Freeport-McMoRan Inc.
FCX
,
Southern Copper Corporation
SCCO
and
First Quantum Minerals
FQVLF
. These are poised to gain from their endeavors to build reserves and control costs while investing in technology and improving production efficiency.
About the Industry
The Zacks Mining – Non Ferrous industry comprises companies that produce non-ferrous metals, including copper, gold, silver, cobalt, molybdenum, zinc, aluminum and uranium. These metals are utilized by various industries including aerospace, automotive, packaging, construction, machinery, electronics, transportation, jewelry, chemical and nuclear energy. Mining is a long, complex and capital-intensive process. Significant exploration and development to evaluate the size of the deposit followed by assessment of ways to extract and process the ore efficiently, safely and responsibly precede actual mining. The miners continually search for opportunities to grow their reserves and resources through targeted near-mine exploration and business development. They strive to upgrade and improve the quality of their existing assets, internally as well as through acquisitions.
What’s Shaping the Future of the Mining-Non Ferrous Industry?
Fears of an Economic Slowdown Weighing on Commodity Prices
: Copper prices have declined for most part of this year due to varied reasons — the uncertainties surrounding the global economy, resurgent COVID outbreaks in top consumer China, the Russia-Ukraine situation, spike in energy costs and low global inventories. Zinc and nickel prices were also weighed down by worries about weak demand as COVID-19 lockdowns in China stoked concerns over a global recession. Silver prices have also been negatively impacted this year, thanks to a stronger U.S. dollar, rising interest rates and sluggish growth. Gold prices also felt the pressure of a rallying dollar and Treasury yields. However, recently, metal prices have found support amid expectations of a pickup in industrial demand as Fed Chair Powell signaled that the central bank may slow the pace of rate hikes this month. Concerns of low supply are also aiding prices.
Cost Control & Innovation to Increase Efficiency
: The industry has been facing a shortage of skilled workforce to date, which hiked wages. Labor-related disputes can be damaging to production and revenues. The industry players are grappling with escalating production costs, including electricity, water and materials as well as higher freight expenses and supply-chain issues. Since the industry cannot control the prices of its products, it focuses on improving sales volume, increasing operating cash flow and lowering unit net cash costs. The industry participants are opting for alternate energy sources to minimize fuel-price volatility and secure supply. Miners are now committed to cost-reduction strategies and digital innovation to drive operating efficiencies.
Impending Demand and Supply Imbalance
: The industry players are currently dealing with depleting resources, declining supply in old mines and lack of new mines. Development projects are inherently risky and capital-intensive. Demand for non-ferrous metals will remain high in the future given their wide usage in primary sectors, including transportation, electricity, construction, telecommunication, energy, information technology and materials. Demand for electric vehicles and renewable energy are expected to be a significant growth driver for metals like copper and nickel in the years to come. The plan to overhaul and upgrade the nation’s infrastructure and promote green policies per the U.S. Infrastructure Investment and Jobs Act will require a huge amount of non-ferrous metals. While demand remains strong, there will be an eventual deficit in metal supply, leading to a situation that will bolster metal prices. This, in turn, would favor the industry in the long haul.
Zacks Industry Rank Indicates Weak Prospects
The group’s Zacks
Industry Rank
, basically the average of the Zacks Rank of all the member stocks, indicates a gloomy near term. The Zacks Mining – Non Ferrous industry, a 13-stock group within the broader Zacks
Basic Materials
Sector, currently carries a Zacks Industry Rank #204, which places it in the bottom 19% of 251 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of this year, the industry’s earnings estimate for the current year has gone down 38%.
Before we present a few stocks that you may want to consider for your portfolio, let’s look at the industry’s recent stock-market performance and its valuation picture.
Industry Versus Broader Market
The Zacks Mining- Non Ferrous Industry has outperformed its own sector and the Zacks S&P 500 composite over the past 12 months. The stocks in this industry have collectively gained 7.1% in the past year compared with the Zacks Basic Materials sector growth of 1.8%. The S&P 500 has dipped 12.8% in the said time frame.
One-Year Price Performance
Industry’s Current Valuation
Based on the forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing Mining- Non Ferrous stocks, we see that the industry is currently trading at 4.95X compared with the S&P 500’s 11.03X. The Basic Materials sector’s trailing 12-month EV/EBITDA is at 6.32X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Over the last five years, the industry traded as high as 8.88X and as low as 3.42X, with the median being at 6.03X.
3 Mining-Non Ferrous Stocks to Keep an Eye on
Freeport-McMoRan
: FCX’s exploration activities near existing mines, which are focused on expanding reserves, will drive growth. It is expected to benefit from the ongoing large-scale concentrator expansion project at Cerro Verde that will likely result in an incremental annual production of around 600 million pounds of copper and 15 million pounds of molybdenum. Cerro Verde’s expanded operations will also offer cost efficiencies, and large-scale and long-lived reserves. It is assessing a large-scale milling operation at El Abra to process additional sulfide material. The expansion at Morenci also increased milling rates. The Lone Star project in eastern Arizona has been completed and is on track to produce more than 200 million pounds of copper annually. The company is looking to advance studies for potential expansions and long-term development options for its large-scale sulfide resources at Lone Star. It is also ramping up underground production at Grasberg in Indonesia, resulting in a spike in milling rates. Focus on cost management and reduction of debt levels is commendable. Shares of FCX have gained 7.6% over the past year.
Based in Phoenix, AZ, Freeport-McMoRan is engaged in mineral exploration and development; mining and milling of copper, gold, molybdenum and silver; and smelting and refining copper concentrates. The Zacks Consensus Estimate for FCX’s earnings for 2023 indicates year-over-year growth of 0.6%. The company currently carries a Zacks Rank #3 (Hold).
You can see
the complete list of today’s Zacks #1 Rank stocks here
.
Price: FCX
Southern Copper
: The company has the largest copper reserves in the industry and operates world-class assets in investment-grade countries, such as Mexico and Peru. Its constant focus on increasing low-cost production is commendable. SCCO expects copper production in 2023 to reach 926,000 tons, with the Peruvian production coming back on track and new production at Pilares, El Pilar and Buenavista. It will gain from its efforts to grow in Peru, given that the country is currently the second-largest producer of copper globally and holds 13% of the world’s copper reserves. Peru’s national output is anticipated grow to 206,999 by next year. Southern Copper’s total investment program in Peru runs to $7.9 billion. Michiquillay is expected to become one of Peru’s largest copper mines and will produce 225,000 tons of copper per year (along with by-products of molybdenum, gold and silver) for an initial mine life of more than 25 years and at a competitive cash-cost. The company’s shares have gained 5.4% in the past year.
The Zacks Consensus Estimate for the Phoenix, AZ-based company’s fiscal 2023 earnings has been revised upward by 7% over the past 30 days. The company, which engages in mining, exploring, smelting, and refining copper and other minerals, currently carries a Zacks Rank #3.
Price: SCCO
First Quantum Minerals
: The company’s platform of cash generating and geographically diversified operating assets poises it well for growth. Focus on operational improvements has resulted in strong production from Cobre Panama and Sentinel in the last reported quarter. The company recently signed a long-term renewable power contract for the CP100 Expansion project at Cobre Panama, which shifts the total energy mix at the mine to approximately 20% renewable by the end of 2023, marking an important step toward achieving its target of reducing its greenhouse gas emissions by 50% by 2030. FQVLF foresees 1 million tons of annual copper production through its organic brownfield opportunities. At Cobre Panama, the CP100 Expansion seems to be on track to add 100 million tons by the end of 2023. At Kansanshi mine, the ongoing S3 Expansion project will boost production and extend the mine life for two more decades. First ore production is expected at the Enterprise project in the first half of 2023. It is a low-cost, high-grade nickel sulfideproject with annual nickel production of 30 thousand tons over an 11-year mine life. The company’s shares have gained 10.3% in the past year.
Headquartered in Toronto, Canada, First Quantum Minerals is a global mining company primarily producing copper, with secondary production in gold, nickel, zinc and cobalt. The Zacks Consensus Estimate for the company’s fiscal 2023 earnings has moved north by 423% over the past 30 days to $1.39 per share. The estimate projects year-over-year growth of 36%. FQVLF has a trailing four-quarter earnings surprise of 32.9%, on average. The stock currently carries a Zacks Rank of 3.
Price: FQVLF
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