Commodity prices took a sharp downward turn in 2013, but the good news appears to be that it will not get any worse in 2014. According a recent report, analysts at Moody's Investors Service say that average prices for aluminum, copper, nickel and zinc have bottomed, but that "prices in 2014 will on average be lower than 2013 levels." That is due to the relatively high prices in force at the end of 2012.
Producers of these base metals will do what all miners are doing: focus on lowering costs and reducing capital spending. Increases to operating costs are expected to moderate, and the focus on cost savings will help offset the lower expected prices. Costs for fuel, energy and labor will continue to rise, though at a slower pace than in the past several years. And do not expect any big new projects in 2014 as capital discipline will rule the day. Following is a look at large producers of each of these metals and a look at whether they may offer an opportunity for a value investor.
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Alcoa Inc. (AA) is up about 9.5% in the past 12 months and up 20% since early October. Demand for new cars and new airplanes continues to be solid. New rules from the Federal Reserve regarding banks' ability to warehouse commodities, including aluminum, could send prices down if the warehouses are indeed hoarding as has been charged. The stock closed at $9.57 Monday, and the consensus analyst price target of around $8.20 implies that the stock is overbought and overvalued. Shares have traded in a range of $7.63 to 9.97 over the past year. With a fiscal year 2014 earnings per share estimate of $0.42, it is valued at nearly 23 times next year's expected earnings.
Rio Tinto PLC (RIO) has just postponed its plans to build a $4 billion aluminum smelter in Paraguay, citing poor market conditions. In September, the CEO of Russian aluminum giant Rusal said that global production of aluminum needed to be cut by 40%. Rio's share price has fallen about 4.5% in the past year and closed Monday at $52.43. The consensus analyst price target on the stock is around $58, implying a potential upside of 10.6%. Earnings for 2014 are forecast at $5.41 per share, and the company's forward multiple is about 9.7.
Freeport-McMoRan Copper & Gold Inc. (FCX) saw its shares rise about 2.4% in the past 12 months. The company made an expensive move to shore up earnings by getting back into the oil business, completing its purchases of McMoRan and Plains. It continues to invest in new mining projects, mostly for the gold production. The stock closed at $34.60 on Monday, and the consensus price target on the stock is nearly $40, implying an upside of 15.6%. The stock's 52-week range is $26.37 to $38.00. Expected earnings in 2014 are $3.24 a share, and the stock's forward multiple is about 10.7.
Southern Copper Corp. (SCCO) holds more copper reserves than any other company in the world, and the red metal makes up 75% of the company's business, about the same role that copper plays in Freeport-McMoRan's operations. Moody's expects copper prices to average around $3 a pound in 2014, which is well below the 2013 average. The company's stock closed at $26.19 Monday and is down more than 30% for the past 12 months. The consensus price target is about $33.20, yielding an implied gain of 26.7%. The stock's 52-week range is $24.50 to $42.03. Analysts expect 2014 earnings of $1.94 a share, and the company’s forward price-to-earnings (P/E) ratio is 13.5.
Vale S.A. (VALE) is the second largest nickel producer in the world and the largest producer of iron ore. The share price has dropped 25% in the past 12 months as nickel prices have fallen from more than $15,000 per metric ton in January 2013 to around $14,000. The good news is that at least one analyst expects nickel demand to grow by 8% in 2014. Shares closed at $14.77 Monday night, in a 52-week range of $12.39 to $21.88. The consensus price target on the shares is about $20.25, implying a potential gain of 37%. The 2014 earnings per share estimate is $2.07, and the forward multiple on the stock is just over 7.
BHP Billiton Ltd. (BHP) shares closed at $64.20 Monday, in a 52-week range of $55.66 to $80.54. BHP, another massive producer of iron ore and a large producer of nickel, closed an Australian nickel mine on Tuesday morning following some safety problems. But the closure was probably hastened by low nickel prices. BHP's share price is down nearly 16% in the past 12 months. The consensus price target on the stock is around $66.10, well below the 52-week high, and implying an upside of just 3%. Earnings in 2015, the company's next fiscal year, are expected to be $5.07, and the forward P/E ratio is 12.7.
Teck Resources Ltd. (TCK) shares closed most recently at $23.20, in a 52-week range of $19.98 to $38.57. The company's share price is down 35% in the past 12 months. Zinc prices have wobbled around $0.85 a pound all year, but the market is tightening for 2014 as demand for galvanized steel has risen in China, according to one analyst, and prices should return to about $0.91 a pound. Teck's consensus price target is around $32.30, for a potential gain of 39%. Expected earnings in 2014 come to $1.89 a share, and Teck's forward multiple is 12.3.
Glencore Xstrata trades over-the-counter in the United States and is listed in London (GLEN). It is the world's second largest zinc producer, but much of the company's attention is focused on taking apart the former Xstrata corporate structure.
Some of these stocks are cheap -- Vale and Teck -- and at least one, Alcoa, is expensive. Among the others, Freeport-McMoRan has a reasonable upside and appears to be priced right now for a value play. If crude oil prices do not collapse next year, Freeport-McMoRan could be a pleasant upside surprise. Southern Copper has a higher potential upside and a higher forward multiple, but it may still be a good second choice. Of the base metals, copper is still the shiniest.
So much of what happens with these stocks next year depends on commodity prices, which in turn depend on demand, and that depends on the global economic outlook. The global economy is expected to be better next year, but not by leaps and bounds. That is probably a good way to look at the base metals producers as well.