Consider Investing in Specialized Mining Companies
If you spot a rally in gold, copper, or another individual metal and want to profit from this specific trend, the most direct exposure through the equity markets comes by investing in companies that specialize in specific metals. Following are some of these companies.
Newmont Mining: Gold
Newmont is headquartered in Colorado but operates gold mines all over the world. It’s the largest producer of gold in South America, one of the most important gold regions, and has wholly owned subsidiaries or joint ventures in Australia, Canada, and Uzbekistan.
Newmont is a premier player in the competitive gold-mining industry. It has some competitive advantages, including its control of 50,000 square miles of land containing more than 90 million equity ounces of gold. (Equity ounces is the amount of gold measured in troy ounces multiplied by the current market price of gold as measured in U.S. dollars.) In addition, it has a strong balance sheet and is in solid financial condition. Check out some of Newmont’s numbers (2015 figures):
Revenues: $12.5 billion
Net income: $78.4 million
Free cash flow: $2.5 million
Profit margins: 19 percent
If you’re looking for a well-managed company with extensive experience and operations in the gold-mining industry, you can’t go wrong with Newmont.
Silver Wheaton: Silver
Silver Wheaton focuses on one thing only: silver. Some mining companies have small operations in secondary metals, but Silver Wheaton generates 100 percent of its revenues from silver mining. The company operates mines primarily in Mexico and Sweden. Its modus operandi is to purchase silver directly from the mines and sell it on the open market for a profit. As a result, the company has very little, if any, operating overhead. This results in strong revenues and cash flows, as you can see from 2015 operations:
Revenues: $585 million
Net income: $169 million
Operating cash flow: $155 million
Profit margins: 52 percent
Silver Wheaton may not generate the same kinds of revenues as Anglo-American or other large mining conglomerates, but it’s a well-run company with high profit margins and stable revenues.
Silver Wheaton’s numbers reflect a strong operating background. It’s actually the second-largest producer of silver, in terms of annual output measured in troy ounces. It produced more than 15 million troy ounces in 2005.
Freeport McMoRan: Copper
Freeport McMoRan (NYSE: FCX) is the largest independent copper producer in the world and also has significant operations in gold mining. Freeport started operations in Texas and rapidly expanded to include other locations in the continental United States and, later, internationally; the company has a strong footprint in Asia. In 2007, Freeport acquired its main rival, Phelps Dodge.
Phelps Dodge had quite a history in the mining industry, having been in the copper business for more than 150 years. As a mining concern, it played a key role in the industrialization of the United States. Copper was in demand by the growing nation, and Phelps Dodge supplied it. The Phelps Dodge acquisition was a huge coup for Freeport, and today the combined company is the market leader in copper production, with significant operations in the production of molybdenum and molybdenum-based chemicals.
Molybdenum (pronounced mah-lib-den-um) is known as a transition metal because it’s principally used as an alloy with a number of metals. It has wide applications in industry — for instance, it’s used in the construction of oil pipelines, aircraft engines, and missiles.
Freeport is also known for operating the largest copper mine ever discovered, the Grasberg mine in Indonesia; the proceeds from Grasberg are so prolific that Freeport is the largest individual taxpayer to the Indonesian government. Freeport is large by any standards, as evidenced by its 2015 financial performance:
Revenues: $17 billion
Net income: $4.7 billion
Operating cash flow: $3.8 billion
Profit margins: 16 percent
Overall, Freeport’s performance has been positive over the last five years, although not without turbulence, due to the global financial downturn.
Phelps Dodge has an active hedging program, in which it enters into agreements with other market participants through the futures markets, to hedge against price risk. However, not all hedgers are created equal, and Phelps Dodge has taken some hits in the past as a result of its hedging activities. During the second quarter of 2006, for instance, the company’s net income fell to $471.1 million from $682.3 million the previous year-over-year quarter.
This was a direct result of losses it incurred in hedging-related activity. So even though the price of copper was robust during this period, and the company would have benefited from these strong prices, its external activities were negatively affected. Always make sure that you know what’s going on with a company before you invest in it.
Alcoa is a household name, and for good reason: It’s the largest producer of aluminum, which is the most ubiquitous metal in the modern world. Cars, soda cans, and fighter jets are all partly made from aluminum, and Alcoa is the primary supplier of this metal in the market today. Alcoa (an acronym that stands for Aluminum Company of America) is involved in all phases of the aluminum supply chain. It provides aluminum-based products to a wide range of customers, including the aerospace and automotive industries, individual and commercial enterprises, the manufacturing sector, and the military.
Alcoa is making some aggressive moves overseas and signing strategic, long-term pacts with some of the top aluminum producers. It recently entered into a partnership with the Aluminum Corporation of China (NYSE: ACH), China’s largest aluminum producer, and is positioning itself to capitalize on the Chinese market, possibly the largest aluminum market in the future. Alcoa has undergone some strategic changes and made some strategic acquisitions — such as purchasing its main competitor, Alcan — that have acted as a drag on its financial performance in the short term. Capturing these market synergies and experiencing some weakness in the aluminum market short term have pressured its profitability. That said, these circumstances present a good opportunity to buy a solid company at a discount:
Revenues: $22 billion
Net income: $2.5 billion
Free cash flow: $350 million
Profit margins: 10 percent
The stock’s performance has been choppy in recent years, so make sure that you research the company as much as possible before you take the plunge.
Mittal Steel, under the management of Indian-born steel magnate Lakshmi Mittal, launched an unsolicited bid to acquire Arcelor, the Luxembourg-based high-end steel manufacturer, in January 2006. After a five-month takeover battle, which involved poison pill and white knight takeover defense strategies, the boards of both companies agreed to a merger of equals. The combined entity created one of the largest independent steel companies in the world.
In mergers and acquisitions (M&A), companies fend off hostile takeovers. One of the most popular defense strategies includes pursuing a merger or acquisition with a “friendly” company, known as a white knight. Another strategy, the poison pill strategy, takes a different approach. This option involves making the company unattractive to an acquirer, such as by increasing levels of debt or increasing the number of shares outstanding to dilute their value.
The new company combines the number one and number two steel producers in the world and controls more than 10 percent of global steel output. Arcelor-Mittal is a truly global steel manufacturer, with operations in all four corners of the globe and across all stages of the steel-making process.