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Metals Mining Industry Outlook: Growth Prospects Healthy

Zacks Equity Research

The Zacks Mining - Non Ferrous industry primarily includes companies that produce non-ferrous metals, including copper, gold, silver, cobalt, molybdenum, zinc, aluminium, uranium, etc. These metals are used by a wide range of industries such as the aerospace, automotive, packaging, construction, industrial machinery, electronics, transportation, jewelry, chemical, as well as nuclear energy.

Let us take a look at the three major themes in the industry:

  • The Mining - Non Ferrous industry is subject to fluctuations based on changes in global economic conditions and metals’ end-use markets. Metal prices have been affected by a gamut of factors, including a stronger U.S. dollar, interest-rate hikes and U.S-China trade war apprehensions. Since the industry cannot control the prices of these products, it focuses on improving sales volumes, operating cash flow and lowering unit net cash costs. Over the past few years, miners have trimmed capital spending and focused on cost-reduction strategies and digital innovation to drive operating efficiencies.
     
  • The industry is currently plagued with escalating production costs. Labor is a major component of input costs for the mining industry. The industry has been facing a shortage of skilled workforce that led to a spike in wages. Moreover, labor-related disputes can be damaging to production and revenues. Miners are feeling the pinch of higher fuel prices. Electricity outages and shortages in several countries are adding to the woes. To minimize fuel-price volatility and secure supply, companies are opting for alternate energy sources.
     
  • Resources are getting depleted, supply from old mines is declining and there is a lack of development of new mines. Further, development projects are inherently risky and capital intensive. Meanwhile, demand for non-ferrous metals remains high given their wide usage in primary sectors, such as transportation, electricity, construction, telecommunication, energy, information technology and materials. Demand is also increasing due to requirement from emerging markets, and economic activity in the United States and other industrialized countries. So, there will be an eventual deficit in metal supply that could aid in bolstering metal prices, which bodes well for the industry in the long haul.
     

Zacks Industry Rank Indicates Bright Prospects

The Zacks Mining – Non Ferrous Industry is a 10-stock group within the broader Zacks Basic Materials Sector. The industry currently carries a Zacks Industry Rank #94, which places it at the top 37% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. 

We will present a few stocks that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and the current valuation first.

Industry Lags S&P 500 and Sector on Shareholder Returns 

The Mining- Non Ferrous Industry has underperformed the S&P 500 as well as its own sector over the past year. The stocks in this industry have collectively dipped 31.7% in the past year, while the Basic Materials Sector declined 12.9%. On the contrary, the Zacks S&P 500 has gained 2.5%, during the same period.

One-Year Price Performance

Mining- Non Ferrous Industry’s Valuation

On the basis of trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Mining- Non Ferrous stocks, we see that the industry is currently trading at 5.3X compared with the S&P 500’s 10.5X. The Basic Materials sector’s trailing 12-month EV/EBITDA is at 8.0X. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)

 

Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)

 

Over the last five years, the industry has traded as high as 17.6X, as low as 4.6X with a median of 8.7X.

Bottom Line

In addition to infrastructure growth in emerging economies, Global GDP growth is expected to underpin continued demand for mining products. Moreover, continued improvement in end-use sectors like automotive, aerospace, construction and packaging, among others, bodes well for metals.

Additionally, gold and silver has long been considered as a safe-haven investment in times of financial or political uncertainties. Overall, the long-term fundamentals of metals remain robust, supported by their significant role in the global economic development and a challenging long-term supply environment.

None of the stocks in the Mining-Non Ferrous industry space currently sport a Zacks Rank #1 (Strong Buy), one stock in the industry currently carries a Zacks Rank #2 (Buy). Below, we have also mentioned three more stocks from the same industry, which, we believe, investors should hold on to as they carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Amerigo Resources Ltd. (ARREF): This Vancouver, Canada-based company carries a Zacks Rank #2 (Buy). The Zacks Consensus Earnings Estimate for fiscal 2019 indicates year-over-year growth of 125%. The company delivered average positive earnings surprise of 31.25%, over the trailing four quarters.

Price: ARREF

 

Arconic Inc. (ARNC): This NY-based company carries a Zacks Rank #3. The Zacks Consensus Earnings Estimate for fiscal 2019 indicates year-over-year growth of 20.4%. The estimate has gone up 2% over the past 90 days. The company delivered average positive earnings surprise of 12.63%, in the trailing four quarters.

Price: ARNC

 

Southern Copper Corp. (SCCO): This Phoenix, AZ-based company carries a Zacks Rank #3. The Zacks Consensus Earnings Estimate for fiscal 2019 indicates year-over-year growth of 7.9%.

Price: SCCO

 

Nevsun Resources Ltd. (NSU): This Vancouver, Canada-based company carries a Zacks Rank #3. The Zacks Consensus Earnings Estimate for fiscal 2019 indicates year-over-year growth of 300%. 

Price: NSU

 

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Southern Copper Corporation (SCCO) : Free Stock Analysis Report
 
Nevsun Resources Ltd (NSU) : Free Stock Analysis Report
 
Amerigo Resources Ltd. (ARREF) : Free Stock Analysis Report
 
Arconic Inc. (ARNC) : Free Stock Analysis Report
 
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