Own the largest resource on earth
While Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is most widely known for its operations in the Grasberg Minerals District, home to the largest known recoverable resource of gold and copper in the world, far fewer investors know how broadly diversified its copper resources are.
An estimated 34% of Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)’s 119.7 billion pounds of proven copper reserves are located in North America, and another 33% are found in South Africa. With total holding of an estimated 33.9 million ounces of gold and 3.42 pounds of molybdenum added to its copper reserves, this is one resource-rich business. Better yet, it is currently priced very cheaply.
With a P/E multiple of only 7.2 times projected 2014 earnings and a current year’s price-to-cash flow multiple of 6.92 in a depressed metals market, this is a business and a stock poised to soar at the first sign of rising prices for base metals.
The current consensus earnings growth rate for the next five years is 17.6% per year, meaning the stock price could double and still carry a price to earnings growth ratio of less than one. By collecting the 4.58% dividend, investors will receive an attractive income stream, rewarding them for their patience while they wait for an improving global economy to raise demand and prices for base metals.
In mining, sometimes you have to dig a little
In the mining business, the numbers that appear on the surface don’t always reflect the whole story. Southern Copper Corp (NYSE:SCCO) is primarily engaged in the mining and smelting of copper, silver, zinc and, molybdenum in Peru and Mexico. It appears to be trading at a reasonably attractive valuation of 12.97 times this year’s consensus earnings estimates, and it pays a reasonable dividend yield of 2.9%. However, when this P/E is compared against the valuations of Vale SA (ADR) (NYSE:VALE) and Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), we see that it is twice the level of similar businesses, and the dividend yield is also significantly lower.
The projected earnings growth rate for Southern Copper Corp (NYSE:SCCO) is 11.6% annually for the next five years. That would make the current price approximately equal to a fair market value, considering it is in line with the projected growth rate going forward. In addition, the price-to-cash flow ratio of 12.45 times is about twice the value currently assigned to other world-class mining operators.
Final thoughts
Investors in any of these three businesses should expect to enjoy favorable results as the global economy continues to improve, driving demand for the base materials these businesses produce. However, considering the far lower valuations currently applied to Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and Vale SA (ADR) (NYSE:VALE), these two businesses appear to offer far more compelling opportunities than Southern Copper Corp (NYSE:SCCO).
Ken McGaha has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and Freeport-McMoRan (NYSE:FCX) Copper & Gold. Ken is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Digging Profits Out Of The Mining Industry Collapse originally appeared on Fool.com is written by Ken McGaha.
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