Profit From the Strength in Base Metals With These Stocks

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Precious metals aren't the only commodities heating up recently. Investors' appetite for base metals has returned with a vengeance on renewed hope that Chinese demand could drive prices even higher. Copper is trading near all-time highs, while zinc and iron are at multiyear highs.

Despite the inflationary effect that rising base metal prices can have on the products we buy, we can use these rising prices to help find potential investments that could beef up your portfolio. If you're considering allocating a portion of your portfolio to base metals, then you should consider these stocks.

Just because you can melt down a penny for more than it's currently worth doesn't mean you can legally do it. Instead, consider taking a position in Southern Copper (Nasdaq: SCCO  ) , which has mines in Peru, Mexico, and Chile. With copper hitting all-time highs, Southern Copper looks particularly inexpensive next to competitor Freeport-McMoRan (NYSE: FCX  ) . Southern Copper's trailing-12-month operating margins eclipse Freeport's by 3%. It also has significantly less net debt and a higher five-year expected growth rate compared with Freeport. At just under 11 times forward earnings, it could be the boost your portfolio needs.

Cliffs Natural Resources
(NYSE: CLF  ) cleared the final hurdle with Consolidated Thompson shareholders on Friday in order to complete its $5 billion takeover. Cliffs has made it no secret, as fellow Fool Christopher Barker points out, that it wants to become an iron ore juggernaut and profit off the expected growth in Chinese demand. Though financed predominantly through debt, this deal will add to Cliffs' already impressive $1 billion in yearly cash flow from operations.

You might be wondering: Why Cliffs and not Vale (Nasdaq: VALE  ) or BHP Billiton (NYSE: BHP  ) ? In this case I feel that size does matter, and Cliffs has a better chance to grow revenues faster than its rivals. I also feel the market has vastly underestimated the growth potential of Cliffs' coal business, which saw a 24% uptick in its most recent quarter.

Zinc is most commonly applied in thin layers to iron and steel products to prevent rusting. As long as Chinese demand for iron and steel products remains strong, Horsehead Holding (Nasdaq: ZINC  ) may be a company worth considering.

Horsehead reported fourth-quarter results on Friday, which easily surpassed expectations. The company cited higher zinc prices and increased demand as the fuel behind its explosion in growth. Unlike considerably larger rival Teck Resources (NYSE: TCK  ) , which found itself under a mountain of debt after purchasing Fording Canadian Coal Trust in 2008, Horsehead has more than $2 in net cash per share. With a market cap of only $705 million, Horsehead is still relatively small and could garner the attention of a larger rival if it continues to grow as quickly as it has been.

What's your take on base metals? Do they deserve a spot in your portfolio, or are they due for a pullback? Share your thoughts in the comments section below and consider adding these stocks to My Watchlist.

Add Southern Copper, Freeport-McMoRan, Cliffs Natural Resources, Vale, BHP Billiton, Horsehead Holding, or Teck Resources to My Watchlist.

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He loves digging around for new investment ideas. You can follow him on CAPS under the screen name TMFUltraLong. Horsehead Holding is a Motley Fool Hidden Gems recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's as good as gold.

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 01, 2011, at 10:44 AM, fritzso wrote:

    I don't hear much about strength in the recovery world wide in all the base metals and iron ore. I realize prices are at almost all time highs with demand somewhat greater than current supply projections but I don't see a great real shortage developing to raise prices now. If you are to invest now, expect more pull back, but expect in the long hual to recoop. If you can stand the moderate pull back and don't want to miss the pending rise if the World does recovery -- 1 to 2 yrs--

    then invest---these are great picks.

  • Report this Comment On March 03, 2011, at 5:28 PM, 05Jag wrote:

    Before investing in Southern Copper, you should know that Grupo Mexico, which owns 80% of SCCO, is trying to force an exchange of the 20% they don't own for shares in Asarco, another copper mining firm which Grupo Mexico also owns. Shareholders of the 20% would get 1.237 shares of Asarco for each of their shares in SCCO. Asarco has gone through bankruptcy after being hit with lawsuits related to asbestos and other environmental problems, but Grupo Mexico bought it out for about $2.6B. I have not been able to determine a fair share price for Asarco, or almost any of the other stats I would usually look at when considering an investment, and have seen one story indicating that former employees and the EPA are still looking into possible environmental problems at one or more of Asarco's former sites. The bottom line, as always, is Caveat Emptor.

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BHP $34.97 Up +0.01 +0.03%
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