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Santa may have gone back to the North Pole until next year, but I'm always making lists and checking them twice to find out which companies have been naughty and nice. With our calendars having rolled over to the new year, it's time we take a closer look at the mineral mining sector.
According to a research report from JPMorgan Chase, global mining capital expenditures totaled $136 billion in 2012. With figures like these, it's important to know which companies will be raking in big profits in 2013. Here are three mineral miners that I feel will outperform this year.
Silver Wheaton (NYSE: SLW )
Silver Wheaton is in an advantageous position this year for a number of reasons. As a silver royalty interest company, Silver Wheaton's average cost of silver is just a shade over $4 per ounce. This means that any silver spot price above this point goes straight into the company's pockets. Silver is slated to have what I figure will be a banner year with an expected rebound in spending in the tech sector, a big consumer of silver. In addition, I foresee the consistent increase in the U.S. money supply as a reason for investors to continue to seek inflationary shelters in both gold and silver.
Silver Wheaton's huge operating margins, which have earned the company the title of "Most profitable company in the world" according to fellow Fool Christopher Barker, allow it to rake in hoards of cash and strike deals heavily in its favor. Just last year Silver Wheaton gave HudBay Minerals (NYSE: HBM ) $500 million upfront, plus the option to receive two additional $125 million payments assuming certain conditions are met, in return for a fixed averaged cost of silver of $5.90 per ounce on 100% of all silver produced at HudBay's Constancia and 777 mines, and a fixed cost on all gold mined at its 777 mine at $400 an ounce until at least 2016.
Alliance Resource Partners (NASDAQ: ARLP )
I apparently missed the class where the U.S. government and electric utilities said they were going to completely eliminate using coal, which accounted for 42% of all electrical generation in 2011, and move entirely to alternative energies. You'd think that was the case given what a horrid year most coal companies had in 2012. Alliance Resource Partners, though, could be ready to ascend to a new high this year.
As I've pointed out on numerous occasions previously, Alliance Resource Partners has recorded 11 straight years of record profits, has boosted its very generous dividend -- currently yielding north of 7% -- for 18 consecutive quarters, and has locked in more than three-quarters of its mined coal through 2018 because of its focus on long-term contracts. These long-term contracts leave, on average, just a fraction of its mined coal exposed to volatile coal market rates giving the master limited partnership incredible cash flow visibility. With President Obama focused on boosting the United States' independence from foreign sources of fuel, coal is set to play a vital role in America's plan for energy independence for at least the next decade.
Thompson Creek Metals (NASDAQOTH: TCPTF )
I know this might seem like an Oakland Raiders fan picking his team to go to the Super Bowl in 2013 (forgive me Raiders fans) since I own Thompson Creek in my own portfolio, but the importance of both its Mt. Milligan coming on line in the fourth quarter and a boost in molybdenum demand cannot be overstated!
Since December 2011, Thompson Creek shored up its financing by twice divvying out royalty interests in Mt. Milligan's gold production to Royal Gold (NASDAQ: RGLD ) in exchange for what will total $781.5 million in cash payments. Thompson Creek also shut down production at its primary molybdenum-producing mine, Endako, in order to reduce costs; it will sell off its stockpile in the meantime. This move could have a very beneficial effect on moly prices; demand for the metal, used to strengthen steel, could soar in 2013 as steel demand from China picks up and supply levels of the steel-strengthener thin out.
As stated earlier, production is on track to begin in the fourth quarter of 2013 for Mt. Milligan. With 2.1 billion pounds of copper, and China looking for ways to ramp up its "paltry" 7.4% GDP growth, I fully expect Thompson Creek to skyrocket in anticipation of production commencing. Then again, remember I'm brutally biased as a current shareholder.
The other side of the rock
Stay tuned for the second half of this article when I reveal three mineral mining companies that I wouldn't dig into if you gave me free money.
If you are looking for a company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, then Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008, and also has increased competitive advantages over its limited peer group. More details about our outlook for Silver Wheaton can be found here in our Motley Fool analyst report.