Metal prices will go up. I do not know when, but I am fairly certain that when global manufacturing of all varieties picks up, there will be upward pressure on the price of industrial metals. That is good news for a company that is poised to benefit from such a rise.
Aluminum has lagged considerably
For me, that company is Alcoa Inc (NYSE:AA). Despite the trying price environment that seems to disappoint at every turn, the company has kept its head above water. It has cut expenses in order to stay profitable. If it can do that in a horrible pricing environment, then I wonder what it can do as the price of aluminum increases.
Due to the company’s ability to squeeze out a profit in a tough environment, I expect the first quarter or two to be really great as prices rise. It could be longer, but I am speculating enough without covering a very long time period. I am using common sense and logic to arrive at this conclusion, which is a serious risk when it comes to the stock market.
Alcoa Inc (NYSE:AA) recently reported earnings, and barring special items, the company made $0.11 a share for 1Q2013. If you include special items, it actually increases to $0.13. Despite the solid earnings, the outlook is not great because the sword of aluminum prices hangs over the head of Alcoa. I still think that the patient investor has a lot to gain from Alcoa. If it sweetens the deal, Alcoa Inc (NYSE:AA) is trading below book value.
Consider diversifying your exposure to industrial metals. Whether that means putting more money in them or dividing up whatever you decide to allocate, diversity is the best way to avoid too much exposure to any one metal.
Diversity of industrial and precious metals
For the sake of efficiency, consider Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), which is in copper and gold. Those two metals are often found together, so it is not surprising that Freeport is in both. Copper, as an industrial metal, seems to be more resilient than aluminum. There are a few reasons for this. Aluminum is extremely prevalent, while demand is high but reasonable. As common as copper is, the demand is out of control.
Demand for copper is outstripping the ability to extract it at an affordable price. You might see this as peak copper, but really it is not about running out of copper so much as it becoming prohibitively expensive or technologically difficult to extract enough to meet growing demand.
Freeport is doing better than Alcoa, with net margin at 16% versus Alcoa’s 4%. That should highlight some of the price issues that punish Alcoa. Despite Freeport being more profitable with less debt and a dividend yield approaching 4%, it is also near its 52-week low of $30.54.
It seems that mining stocks, in general, are suffering from a decline stemming from falling earnings. Freeport’s EPS ttm has been declining, but may have reached a bottom. Freeport is considered a lot because of gold, which has lagged lately, disappointing many gold bugs. Now that the stock is approaching its 52-week low, it is time to keep an eye out for the bottom.
Looking overseas for metal opportunities
All mining companies tend to be very international, but if the two companies above are not international enough, then consider Vale SA (ADR) (NYSE:VALE), which is a major mining company out of Brazil. With this company, you gain exposure to iron and nickel, along with a ton of other stuff. The company also has an energy unit that runs hydroelectric dams and operates railways and maritime transport in Brazil.
The company is nearing its 52-week low, but deservedly. Net income ttm, and with it EPS ttm, has been falling since late 2011. Falling metal prices have hurt the company.
Despite Vale’s seeming weakness, a combination of a strong Brazilian economy in relative terms, coupled with an eventual increase in the price of industrial metals could help the company. It posted a massive quarterly loss. The stock may bottom out, though be on the lookout for a general market pullback. If it does hit a bottom, Vale SA (ADR) (NYSE:VALE) should definitely be considered, especially considering its 4.5% dividend yield.
Conclusion
Do not invest in all three companies. I would pick two that end up being your favorites. I like Alcoa Inc (NYSE:AA) and would probably stop there, but my second choice would be Vale. I cannot really see too much that recommends Freeport over Vale, but Freeport is characterized as a gold miner and I think it is going to get increasingly expensive to mine gold, depressing margins in the process.
All three companies are near their 52-week lows. An overall decline of the entire market could still push stocks lower, so do some digging and wait for the earnings season to get under way to see what happens.
Nihar Patel has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold.
