After a five-year slide, there are some modest signs among commodities and mining stocks that a turnaround has finally come. Demand in China is picking back up for critical commodities such as iron ore and copper, while some of the higher-cost mining operations have been pushed out of the market. These are all leading to modest upticks in prices that are making mining stocks look more attractive again.
In the spirit of a commodities and mining rebound, we asked three of our energy contributors to highlight mining stocks that they consider worth putting on one's radar. Here's why they picked Cliffs Natural Resources (NYSE:CLF), ArcelorMittal (NYSE:MT), and BHP Billiton (NYSE:BHP).
Back on track
Tyler Crowe (Cliffs Natural Resources): For the past several years, Cliffs Natural Resources has looked like a shaky investment. Sure, it had low-cost iron ore operations in the U.S. and supplied more than half of U.S.-based steel plants with iron ore, but it was saddled with lots of unprofitable or undeveloped assets ranging from metallurgical coal and chromium mines. The intent was to be a one-stop shop for everything a company needed in the steelmaking process, but a company would only want to shop at one store if it's the cheapest. On top of that, it was saddled with a mountain of debt that was used to buy all those ancillary assets.
When the commodities bubble burst back in 2012 as China started to scale back its infrastructure fueled expansion, Cliffs was left with loads of unprofitable assets and too much to handle. It got so bad that activist investors intervened, gutted the board, and put current CEO Laurenco Goncalves in charge. His strategy since then has been to strip the company of all those unprofitable assets, focus its efforts on those low-cost U.S. operations, and pay down debt.
So far, it looks like this plan is working. The company just posted positive annual net earnings for the first time since 2013 in the middle of what is still considered a tough market for iron ore in general. Furthermore, it has cut its debt load by more than half in the past five years.
From here, Cliffs Natural Resources plans to expand production in the U.S. and start producing direct reduced iron. This higher-quality product is used in electric arc furnaces, a steelmaking method that is becoming ubiquitous in the U.S. By moving more and more toward this product, it will ensure it maintains its high market share within the American market.
After a close call with bankruptcy just a couple years ago, the company is in a much better place both strategically and financially. So much so that investors may want to take a look.
This integrated miner and steelmaker is a great way to gain exposure
Jason Hall (ArcelorMittal): ArcelorMittal offers something that not many mining companies do: vertical integration. Besides being one of the world's biggest iron ore and coal miners, ArcelorMittal is also a major steelmaker, and one of the world's largest distributors of steel products, operating hundreds of facilities in more than two dozen countries around the world.
That vertical integration hasn't made ArcelorMittal bulletproof -- its steelmaking operations have actually been a burden on the company in recent years, leading to billions in asset writedowns as management has been forced to idle and permanently close facilities. But with the bulk of that effort complete, the company is now positioned to take advantage of its low-cost iron and coal assets to feed its now-profitable steelmaking facilities.
ArcelorMittal delivered a solid 2016, generating $4.2 billion in operating income and $1.8 billion in net income, or $0.62 per share. At recent prices, ArcelorMittal trades at a price-to-earnings multiple around 14.5, on the cheaper side for a company with strong prospects to grow its profits in coming years. ArcelorMittal is a great company to buy and at the right time in the demand cycle for its products.
Stick with the top dog
Matt DiLallo (BHP Billiton): BHP Billiton is one of the largest global resources companies in the world. In fact, it is among the top producers of iron ore, metallurgical coal, copper, and uranium while also producing a substantial amount of oil, natural gas, and energy coal, among other commodities. That diversification across the natural resource sector makes it an excellent way for an investor to gain broad exposure to the mining industry.
However, what's important to note about BHP's portfolio isn't just its diversification but that it controls some of the largest, lowest-cost mines in the world. The low-cost nature of its business helps insulate the company from the volatility of commodity prices, enabling it to keep generating cash flow even at the bottom of the cycle.
Another important characteristic of BHP Billiton is that it has one of the strongest balance sheets in the industry. That financial strength enables it to continue to invest in compelling long-term growth projects during periods of market turmoil. For example, the company is currently spending $2.6 billion on what it believes is the best undeveloped potash project in the world. In addition, it just sanctioned a $2.2 billion investment for an oil project in the Gulf of Mexico to unlock one of the largest undeveloped resources in the basin. Once complete, these projects will provide the company with cash flow for decades to come.
BHP Billiton has the diversification and balance sheet strength to stand the test of time, making it one of the few mining stocks that an investor can buy and hold.
Jason Hall owns shares of ArcelorMittal. Matt DiLallo owns shares of BHP Billiton. Tyler Crowe owns shares of BHP Billiton and Cliffs Natural Resources. The Motley Fool owns shares of Cliffs Natural Resources. The Motley Fool has a disclosure policy.