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Non Ferrous Metal Mining Industry's Near-Term Prospects Dim

Madhurima Das

The Zacks Mining - Non Ferrous industry comprises companies that produce non-ferrous metals, including copper, gold, silver, cobalt, molybdenum, zinc, aluminum and uranium, to name a few. These metals are utilized by a wide array of industries that include aerospace, automotive, packaging, construction, industrial machinery, electronics, transportation, jewelry, chemical, and 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 end-use markets. Metal prices have been affected by the market uncertainty with regard U.S-China trade war and weakening growth in China – the world’s largest consumer. Even though there has been a pickup in prices lately on prospects of a trade war truce and expectations of a U.S. interest rate cut, metal prices still remain below last year levels. Since the industry cannot control the prices of these products, it focuses on improving sales volume, 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 forms the bulk 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 woes. To minimize fuel-price volatility and secure supply, the 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 Dismal Prospects

The group’s Zacks Industry Rank, which is 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 is an 11-stock group within the broader Zacks Basic Materials Sector. The industry currently carries a Zacks Industry Rank #183, which places it at the bottom 28% of more than 250 Zacks industries.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over a year’s time, the industry’s earnings estimate for the current year has declined 48%.

Despite the bleak near-term prospects of the industry, we will present a few Mining – Non Ferrous stocks that can be retained in one’s portfolio given their long-term prospects. But it’s worth taking a look at the industry’s shareholder returns and 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 fell 17.8% in the past year, while the Basic Materials Sector declined 11.8%. On the contrary, the Zacks S&P 500 has rallied 4.9%, during the same period.

One-Year Price Performance



Mining- Non Ferrous Industry’s Valuation

On the basis of forward 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 7.9X compared with the S&P 500’s 12.1X. The Basic Materials sector’s forward 12-month EV/EBITDA is at 5.9X. 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 has traded as high as 8.0X and as low as 4.9X, with the median being at 6.1X.

Bottom Line

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

We are presenting one stock with a Zacks Rank #1 (Strong Buy) and three stocks with a Zacks Rank #3 (Hold) that are well poised to grow. You can see the complete list of today’s Zacks #1 Rank stocks here.

Arconic Inc. (ARNC): This NY-based company sports a Zacks Rank #1. The Zacks Consensus Earnings Estimate for fiscal 2019 indicates year-over-year growth of 36.8%. The estimate has gone up 12% over the past 90 days. The company has an average positive earnings surprise of 12.94%, in the trailing four quarters.

Price: ARNC
 



Amerigo Resources Ltd. (ARREF): This Vancouver, Canada-based company carries a Zacks Rank #3. The Zacks Consensus Earnings Estimate for fiscal 2019 indicates year-over-year growth of 87.5%. The company has an average positive earnings surprise of 31.25%, over the trailing four quarters.

Price: ARREF



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 13.5%.

Price: SCCO
 



Aluminum Corporation of China Limited
(ACH): This Beijing-based company carries a Zacks Rank #3. The Zacks Consensus Earnings Estimate for fiscal 2019 indicates a stellar year-over-year growth of 3100%.

Price: ACH


 

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Southern Copper Corporation (SCCO) : Free Stock Analysis Report
 
Amerigo Resources Ltd. (ARREF) : Free Stock Analysis Report
 
Arconic Inc. (ARNC) : Free Stock Analysis Report
 
Aluminum Corporation of China Limited (ACH) : Free Stock Analysis Report
 
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