Morningstar Analyst Zhao Hu believes Jiangxi Copper Co Ltd’s (HKG:0358) self-sufficiency will be lower this year. He says the decrease will be due in part to the fact that the company is owned by the provincial government, which he says is designed to maximize size and tax revenue, but not returns and economic profit.
“So what that means is they are going to continue to expand its copper refining and smelting business in order to sustain leading market shares of refined copper in China,” Hu says. “But as we know, refinery does not make a very good return or profits on its investments compare to its mining business, so as China consumes more and more copper, the company is going to build more and more refineries.”
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Hu says Jianxgi Copper’s mining output has been growing in the low-single digits, while its refinery capacity has grown at double digits for the past five years. That, he says, is why he expects a lower self-sufficiency ratio going forward.
“And what this does is the company’s margin is going to come under pressure as a lot more of its revenues are coming from the lower margins business,” Hu says. “And that will dampen the company’s earnings going forward.”
Bradford Cooke, Founder and CEO of Endeavour Silver Corp (EXK), says he believes 2014 could be a turnaround year for precious metals. He says that will bode well for his company and its shareholders.
“Endeavour is one of the most leveraged of the silver producers, and for every $1 move in the price of silver, we could see an $11 million increase in our annual earnings before tax, EBITDA,” Cooke says. “That means we can potentially double our EBITDA for every 25% move in the price of silver.”
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Cooke says Endeavour Silver Corp is forecasting three years of organic growth, which he says will create shareholder value. In addition, he is anticipating stronger silver prices toward the end of this year.
“If the precious metal prices move into the next leg of the commodity cycle this year, the shares could and should outperform the metals,” Cooke says.
Stillwater Mining Company CEO Mick McMullen says Wall Street doesn’t fully appreciate the value of his company’s smelter and recycling business. He says that segment of the business generates good margins, is low-risk and can be easily expanded.
“We do have the second world-class asset in the form of the smelter and recycling business, which historically, the revenue from that has just been portrayed as a credit against the mine operations,” McMullen says. “They are actually two separate businesses.”
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The investment community also tends to misunderstand the labor intensity of Stillwater’s mining operations, McMullen says. He believes there is a perception that the company’s mine is not very productive and requires labor-intensive hand-held mining.
“And the reality is that in the early days that was the case,” McMullen says. “However, now most of the ore tons that we mine from underground are by mechanized means; we do a small amount of hand-held mining, but efficiency has improved significantly.”
Executive turnover is finally beginning to show signs of growth again, a positive sign for the North American economy. The last number of months executive turnover was rather slow in comparison to a year earlier but we are beginning to see signs of a slight growth in turnover among the executive ranks. The increase in executive turnover seems to correlate with the latest more positive news regarding job growth in the Amercican economy. Earlier on Friday morning April 4, the U.S. Department of Labor Bureau of Labor Statistics (BLS) announced March employment Report and as expected the numbers were reasonably positive. According to the BLS Report,
Nick Carter, President and COO of Natural Resource Partners LP (NRP), says the company intends to pursue a three-pronged acquisition strategy. The first two parts of the strategy focus on purchasing coal assets, as well as aggregates and industrial minerals.
“We will look at coal assets, and if we can find accretive coal assets — where we’re certain enough about the market, and the levels of production and the pricing that they can achieve — we will certainly buy those assets,” Carter says.
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The third prong of Natural Resource Partners’ acquisition strategy is to buy oil and gas assets. But, Carter says the company does not intend to be an operator in that arena.
“You will not see a drill rig with NRP’s name on the side of it, but we will participate in drilling programs or in drilling as a working interest, but as a non-op working interest,” Carter says. “And we will buy royalties, and we will buy reserves and lease those reserves out, but we are not going to be an operator. In any of our businesses, we’re not going to be an operator.”
RTI International Metals, Inc. (RTI) CEO Dawne Hickton says the company prepared itself for domestic budget cuts and lower defense spending. In addition to supplying titanium mill products and specialty metal components to the aerospace & defense sector, RTI International also serves the energy and medical device markets.
“At one point in time, if you went back four years, the defense portion of our business was almost 40% of what we were doing. Now, that included aircraft as well as armored vehicles and cannons and tanks. In fact, we today still supply on the M777 howitzer,” Hickton says. “But as we saw the writing on the wall with the reducing defense budgets, we really focused on trying to diversify ourselves.”
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Hickton says RTI made an acquisition that helped the company diversify into the medical device market. She said the defense market remains important, but only represents 40% of RTI’s business today. She says RTI International Metals focuses on key defense projects that require titanium, such as the Joint Strike Fighter Program.
“We think we have a very strong position on the programs of the future…where we are today, the Joint Strike Fighter is still a strong program that’s getting a lot of support in Washington,” Hickton says. “Longer term, cyber technology is really where the defense strategy is going, and so today, we work with satellite systems, and we work on radar systems. This is where the defense portion of our business is going to be focused in the future.”
Deutsche Bank Analyst Rob Clifford says Glencore Xstrata PLC has high prospects for capital returns. Clifford says Glencore is in the process of selling Las Bambas, a high-growth copper mine in Peru, and has made it clear how it will use proceeds from the sale.
“The proceeds [from the Las Bambas sale], the company has previously said on number of occasions, would be used for three purposes: return to shareholders, company growth and balance sheet management,” Clifford says. “And return to shareholders would be taken very positively by the market, which there is still the big concern around not getting returns.”
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The big miners, Clifford says, have done a good job of trimming costs. But, he says none of them have returned a significant amount of cash to the market.
“So certainly, the first of the big miners to do that will be rewarded for that,” Clifford says. “I think it’s a pretty significant catalyst for that stock this year.”
Morningstar analyst Zhao Hu says investors would be wise not to look at China Shenhua Energy Company Limited (HKG:1088) as only a coal story. Even if coal continues to underperform, Hu says China Shenhua’s other businesses will offset the negative impact.
“China Shenhua is a little bit different than the other pure-play coal companies we cover primarily because of its vertical integration strategy,” Hu says. “The company recognized the coal sector’s volatility and was able to expand upward and downward into different sectors that include railway transportation, power generation as well as some shipping and port operations.”
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Hu says China Shenhua’s earnings are only 50% leveraged to coal. The other half comes from non-coal businesses, which bodes well in the current environment, Hu says.
“For example, its rail will actually benefit from increased production of coal regardless of prices,” Hu says. “China Shenhua’s power business also benefits from lower coal prices because they use coal as their raw material.”
Ignace Proot, an analyst with Sanford C. Bernstein & Co. LLC, says Freeport McMoRan Copper & Gold (FCX)’s stock price does not reflect the value of the company’s reserves.
“Within my coverage when I compare my fundamental DCFs or discounted cash flow model derived price targets with where the stocks are trading today, the largest upside is actually for Freeport and that’s really because the market today is not recognizing the value of all the reserves that they are having,” Proot says.
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Additionally, Proot says Freeport McMoRan is a good stock for investors who want exposure to copper.
“[Copper] is a very bullish commodity, it’s only 4% to 5% price growth per year compared to zinc which is more than double, but it’s still substantial,” Proot says.
Eagle Materials, Inc. (EXP) is currently in the process of greenfielding a frac sand mind in Illinois that could grow to the size of its existing wallboard and cement business, says Todd Vencil, Research Analyst at Sterne Agee & Leach, Inc.
“That’s a company that I think is a very good company and incredibly well-run company that has some obviously very good opportunities ahead of it in the market recovery in the construction materials business, that’s all got itself set up to benefit from the energy boom if they’re able to do what they think they can,” Vencil said.
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Eagle Materials could greatly benefit from the growth of unconventional production of oil and gas in shales by providing sand to the hydraulic fracturing process.
“They are waiting on a final permit that we think they probably ought to get a ruling on by the end of this month. If they are able to do what they think they can do with this frac sand business, that business could end up being as big as even the original focus,” Vencil said.
