The prospects of the Zacks Mining - Non Ferrous industry look bleak at the moment as apprehensions about slowing demand and economic activity already affected commodity prices lately. Additionally, the industry players are grappling with inflated input costs, labor shortages and supply-chain issues.
Against this backdrop, we suggest keeping a close eye on companies like Freeport-McMoRan Inc. FCX, Centrus Energy LEU and Fission Uranium FCUUF. 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 and through acquisitions.
What's Shaping the Future of Mining-Non Ferrous Industry?
Fears of an Economic Slowdown Weighing on Commodity Prices: Copper prices declined lately amid the uncertainties surrounding the global economy as new coronavirus restrictions in China dwindled demand for the red metal, hurting prices. Prices were decreased by the Russia-Ukraine situation, a spike in energy costs and low global inventories. A slowdown in China’s economy and credit tightening may reduce spending on infrastructure and construction projects in the country that might further shrink demand for copper. Zinc prices also bore the brunt of 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 so far, weighed down by the stronger US dollar, rising interest rates and sluggish growth. Gold prices also felt the pressure of a rallying dollar and Treasury yields as a robust U.S. services sector report reinforced expectations that the Federal Reserve will likely raise interest rates. However, Uranium prices have gained owing to rising demand for clean energy.
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. 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, will 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 gloomy prospects in the 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 #243, which places it in the bottom 4% of 256 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. So far this year, the industry’s earnings estimate for the current year has gone down 32%.
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 Lags S&P 500 & Sector
The Zacks Mining- Non Ferrous Industry has underperformed its own sector and the Zacks S&P 500 composite over the past 12 months. The stocks in this industry have collectively lost 40.7% in the past year compared with the Zacks Basic Materials sector decline of 20.6%. The S&P 500 has dipped 7.3% 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 8.14X compared with the S&P 500’s 19.92X. The Basic Materials sector’s trailing 12-month EV/EBITDA is at 6.28X. 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 4.80X, with the median being at 6.46X.
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. Freeport-McMoRan will benefit from an ongoing large-scale concentrator expansion project at Cerro Verde that will provide incremental annual production of around 600 million pounds of copper and 15 million pounds of molybdenum. Cerro Verde's expanded operations benefit from 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. Further, Freeport identified a significant resource at the Lone Star project in eastern Arizona. The project is completed and is on track to produce more than 200 million pounds of copper annually. Freeport-McMoRan 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.
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. FCX has a trailing four-quarter earnings surprise of 2.8%, on average. It has a long-term estimated earnings growth rate of 29%. FCX currently carries a Zacks Rank #3 (Hold). Shares of FCX have declined 22.7% over the past year.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Centrus Energy: LEU’s order book is at around $1 billion, with multi-year contracts, which poises it well for growth. Prices in the global uranium enrichment market have gained significantly so far in 2022, enabling Centrus Energy make long-term sales at higher prices and margins. In the first half of 2022, LEU secured more than $135 million of new sales contracts and commitments. It is uniquely positioned to meet growing demand for U.S.-origin Low-Enriched Uranium and High-Assay, Low-Enriched Uranium (HALEU). Being the only company in the United States licensed to produce HALEU, Centrus Energy has an edge over its peers. LEU continues to meet all milestones under the HALEU contract with the U.S Department of Energy to date. It recently completed conceptual design for a commercial-scale HALEU cascade that will have 120 centrifuges and a much larger output than the 16-centrifuge demonstration cascade. Each 120-machine commercial cascade could produce approximately 6 metric tons of HALEU, annually. Subject to the availability of funding, Centrus Energy has the capability to expand HALEU production at the Piketon facility and also produce Low-Enriched Uranium for the existing reactors. Backed by these developments, the stock has gained 41% over the past year.
Headquartered in Bethesda, MD, Centrus Energy is a globally recognized supplier of Low-Enriched Uranium (LEU) fuel. The Zacks Consensus Estimate for fiscal 2022 earnings has been stable over the past 60 days at $3.39 per share. LEU has a trailing four-quarter earnings surprise of 3,872%, on average. The stock currently carries a Zacks Rank of 3.
Fission Uranium: Earlier this year, FCUUF repaid the remaining $7 million balance of its secured credit facility and is now completely debt and lien free. Fission Uranium continues to advance its high-grade, near surface Patterson Lake South Property uranium project in Saskatchewan, Canada on schedule. The Patterson Lake South Property is host to the class-leading Triple R uranium deposit. FCUUF achieved multiple feasibility study milestones, including completion of field work for geotechnical, hydrogeological and metallurgical purposes. Additionally, detailed engineering studies and planning of the proposed mine design are now in progress and are well advanced.
This Kelowna, Canada-based company acquires, explores and develops uranium resource properties in Canada. The Zacks Consensus Estimate for fiscal 2022 earnings has been steady over the past 60 days. Shares of this presently Zacks #3 Ranked player have declined 12.7% in a year’s time.
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FreeportMcMoRan Inc. (FCX) : Free Stock Analysis Report
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