Way back in 2011, miners looked like they would ride global demand to ever-higher earnings. But that was then and this is now: Commodity prices have fallen across the board and many miners are more worried about survival than growth. Here's three that are not only surviving but getting stronger as they await the next industry upturn: BHP Billiton Limited (ADR) (BHP -0.72%), Westmoreland Coal (WLB), and Cameco (USA) (CCJ -0.50%).
Diversification
BHP Billiton is among an elite class of giant miners, producing a large collection of commodities. That said, the miner recently spun off most of its smaller operations in South32 so it could focus on iron ore, copper, metallurgical coal, and oil. The thing about this spinoff is that it represented a new phase in the company's efforts to improve its business.
The first thing that BHP did as commodity prices started to head lower was cut costs. But after trimming spending on investing activities from roughly $32 billion in 2012 to $15.8 billion in 2014, the benefits of cutting back even more were less noteworthy. So, the company shifted to structural changes, jettisoning less profitable lines so its more profitable ventures would shine through. This will position BHP strongly for the eventual upturn in the often volatile commodities markets.
Source: BHP Billiton Investor Presentation
But that doesn't mean it's been doing poorly. In fact, just the contrary. Cost cutting and staying focused on improving operations has allowed BHP to remain profitable throughout the downturn. Moreover, it's increased its dividend in each of the last 10 years. So, in BHP, you are getting a survivor and a miner that's readying for the next upturn.
No one likes coal
Coal miner Westmoreland is in one of the most despised industries. But that hasn't stopped it from doing well. OK, that depends on how you define well. In this case, Westmoreland has been bleeding red ink for years, but it has been cash-flow positive since 2010 even as it spends to grow its business. And it has a unique position in the thermal coal market: It owns coal mines that are located near, even next to, its customers' coal-fired power plants.
That's an advantage that most other miners don't have, as it materially reduces coal shipping costs and makes Westmoreland the go-to choice for its customers. That's why its average contract length is roughly 10 years. In fact, 11 of its 13 mines have just such prosperous locations coupled with long-term contracts.
Looking to the future, however, the miner recently acquired a limited partnership which has since been renamed Westmoreland Resource Partners (NYSE: WMLP). This is big because it allows Westmoreland to sell its coal mines to the LP, called a drop down, to raise cash for future acquisitions. And, thus, provides a new source of funding for the coal miner to fuel its growth. It believes there are between 15 and 25 coal mines that it could add to the fold that also fit its business model. But since it runs and has a large stake in the LP, Westmoreland Coal will still benefit from the coal mines it sells via distributions, the fees it earns for running the mines, and incentive rights as the LP's distribution increases over time.
Coal is unloved, but Westmoreland has a unique position in the industry that should allow it to continue to do well today and do even better when the market improves.
Going nuclear
The third miner to look at is uranium producer Cameco. Perhaps the only thing less loved than coal is uranium, but that's really an issue of headline risk -- not operating performance. In other words, when something goes wrong in the nuclear power space it goes wrong in a big way. But when you dig beneath the headlines, nuclear power has a long track record of reliable and mostly safe operation.
It also happens to be a relatively clean fuel, since it doesn't emit carbon dioxide (like coal and other carbon-based fuels). This is one of the reasons why the nuclear power industry is expected to expand across the globe between now and 2025, adding 81 new power plants to the existing global fleet. As of 2015, 63 of those plants were under construction. The impact, driven largely by Asia, will be an increase in demand for uranium.
How much demand? Cameco projects uranium consumption will increase from 165 million pounds to 230 million pounds. Only current production is just 155 million pounds, which without additional investment will decline to 140 million pounds by 2025. In other words, there's a potentially large future for uranium miners who survive through the current uranium market downturn.
Source: Cameco Investor Presentation
And so far, Cameco appears to be a survivor. In fact, it's been profitable in each of the past 10 years, which is impressive since uranium prices peaked in 2011 along with other commodities. So Cameco really does have a mixture of a bright future and profitable present.
Diamonds in the rough
It's easy to say there's no stocks worth watching in the mining industry. But you can't paint an entire industry with a single brush, because there's a lot of variation in the gray areas. For investors willing to be greedy when others are fearful, three miners worth watching in the mining industry because they are both surviving today and setting themselves up for a better tomorrow are BHP, Westmoreland, and Cameco. A deep dive in all three would be well worth the effort.
