A Dirt-Cheap Mining Twosome -- and Their Pals

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Watching the mining companies race downhill of late may be terrific preparation for taking in the 2014 Winter Olympics from Sochi, Russia. But it can be a gut-wrenching exercise from an investment perspective.

I'm referring first to Brazil's Vale (NYSE: VALE  ) and London-Based Rio Tinto (NYSE: RIO  ) , two behemoth companies whose shares have plummeted by 34% and 28%, respectively, since the first clock ticks of 2013. However, if I recall correctly, a key tenet of investing involves buying low and selling high. On that basis, the two companies appear to provide patient Fools with extremely compelling opportunities for future profits.

Hardly a VALE of tears
Rio de Janeiro-based Vale, for example, sports a sizable $73.5 billion market capitalization and produces an array of minerals that includes iron ore and pellets, copper, manganese, ferroalloys, cobalt, platinum, nickel, and fertilizers. It also mines precious metals and maintains a variety of Brazilian mining-related transportation systems, including railroads and ports.

But what's most likely to pique your interest in the company are metrics that juxtapose a forward P/E ratio at a paltry 6.45 times with an attractive PEG ratio that sits on the shy side of 0.50. (Remember that the PEG ratio is the quotient derived from dividing a company's P/E by its anticipated growth rate. So numbers below 1.0 become especially intriguing.) At the same time, Vale's operating margin nudges a healthy 30%, and it offers an alluring 5.30% forward annual yield. What's more, a significant portion of its price slide may be tied to weakness in the Brazilian Real.

Robust RIO
Rio Tinto presents a similar picture. The slightly larger -- $80 billion market cap -- company cranks out all manner of aluminum products, along with copper, molybdenum, coal, uranium, and iron ore, among others. It also produces both silver and gold.

At 7.48 times, the company's forward P/E represents only a slightly higher valuation than Vale's. Similarly, its PEG ratio sits a smidgen atop 0.50. At approximately 22.5%, its operating margin is about 25% below its Brazilian competitor's. The company's forward annual dividend yield is 4.20%. It's also worth noting that half of the analysts who follow Rio Tinto rate it a buy, while the remainder all accord it a strong buy rating.

Pour in petroleum
I'm slightly less sanguine about the largest of the world's miners, Melbourne-headquartered BHP Billiton (NYSE: BHP  ) . The company, with a market cap of $168 billion, mines and markets aluminum, coal, copper, iron ore, manganese, nickel, silver, and uranium. More importantly perhaps, apart from its slightly smaller peers, BHP has become a major global oil and gas operator.

As BHP's website notes, its primary petroleum operations are directed toward "largely proven basins, such as the U.S. Gulf of Mexico, Australia, and the South China Sea." Beyond that, "We also have a range of promising prospects in the Philippines, India, Trinidad and Tobago, Algeria, Pakistan, and Malaysia."

Two years ago, BHP paid $12.1 billion in cash to acquire Petrohawk Energy, a leader in the Haynesville shale and the first company to drill a successful well in the prolific Eagle Ford shale.

At 18.3 times, BHP Billiton's forward P/E ratio is substantially higher than Vale's and Rio Tinto's. At the same time, its 3.60% forward dividend yield trails both the other companies.

Freeport's new additions
Finally, BHP isn't the only major mining company that concurrently includes the potential benefits of oil and gas operations. As of last month, Freeport-McMoRan (NYSE: FCX  ) , the world's largest publicly traded copper producer, completed the acquisitions -- for a total near $20 billion, including debt assumptions -- of Plains Exploration and Production Company and McMoRan Exploration.

 In the process, Freeport added domestic petroleum operations in the Gulf of Mexico, along the Gulf Coast (including the Eagle Ford), in California, and in the Rocky Mountain region. Its mining operations continue occur in North and South America, Indonesia, and the Democratic Republic of Congo.

When announced in December, the acquisitions didn't sit well with investors, including yours truly. But as the skepticism erodes, it appears likely that Freeport's current 7.80 times forward P/E, its 0.50 PEG ratio, its 30% operating margin, and its 4.20% indicated forward yield will have signaled another undervalued mining-energy combo company.

Foolish bottom line
Admittedly, the world's economy continues to struggle. And I'm admittedly less enthusiastic about the U.S. "recovery" than are many other economists. Nevertheless, given the metrics of the above-mentioned companies, it's difficult to ascertain how any of the foursome represent a better sell than a buy.

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5/31/2016 4:02 PM
BHP $26.97 Down -0.53 -1.93%
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VALE $3.93 Down -0.05 -1.26%
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