Teck Resources (TECK 4.42%) has had a heck of a run over the past 18 months. From the beginning of 2016 to today, Teck's stock has gained an astounding 397%. While rising commodity prices have certainly played their part in lifting Teck's business, management's decision to wind down capital spending as new projects come on line has allowed the company to reduce debt and significantly boost free cash flow. This improvement even comes before Teck's multibillion-dollar investment in the Fort Hills oil sands project starts up by the end of the year.
Investors who were lucky enough to ride Teck's wave are likely patting themselves on the back for sticking through the tough times. Chances are, though, that Teck won't be able to repeat this kind of performance over the next 18 months. So we asked three of our contributors to highlight a stock they think has the right combination of factors working in its favor to get a Teck-like return. Here's why they think U.S. Silica Holdings (SLCA +0.00%), Cliffs Natural Resources (CLF 5.16%), and Sandstorm Gold (SAND +0.00%) have what it takes for the next spectacular share price rise.
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Riding the wave of shale production back to profits
Jason Hall (U.S. Silica Holdings Inc.): Over the course of the oil downturn, shares of U.S. Silica have performed like a great big roller coaster:
The company has largely "earned" this, with its earnings falling hard and fast along with the contraction in demand for its biggest product: frac sand used for oil and gas production from shale and other tight formations.
The good news is that the downturn has led to huge technological and process improvements in the oil patch, forcing domestic producers to either find ways to make money at $40 oil or go out of business. That's helped drive domestic production back higher, to the benefit of U.S. Silica.
After seeing earnings fall steadily (and turn into losses in 2016), U.S. Silica reported a $2.5 million profit in the first quarter as frac sand volumes and revenue increased both year over year and sequentially. This big increase helped more than double the contribution margin from the oil and gas proppants segment to $39 million, versus the fourth quarter of 2016.
This, of course, is no guarantee that U.S. Silica's profits will only go up from here -- the company is still heavily tied to the whims of oil and gas producers. But the playing field has changed significantly over the past two years, and U.S. producers are indeed able to make money at far lower oil prices than at the peak. If that remains the case, demand for frac sand will remain high, and that means there's a decent chance U.S. Silica shareholders could do quite well as the cycle shifts back to growth mode.
Same name, entirely different company
Tyler Crowe (Cliffs Natural Resources): I can empathize with anyone who has no interest in touching shares of Cliffs Natural Resources ever again. Five years ago, the company swung for the fences by acquiring iron ore and chromite mines in Canada. Unfortunately, those acquisitions ended up being a costly fly ball as commodity prices declined and those facilities no longer were economical. What made those acquisitions worse was the monumental debt load management added to make the purchase. This left Cliffs in a financial bind that looked like the company was going under.
Today, the story is much different. Executives who made that blunder of an acquisition are gone, and current CEO Laurenco Goncalves has sold off those assets, focused operations around its iron ore mines in the U.S. and Australia, and trimmed Cliffs net debt load to a manageable $1.35 billion. These actions have turned a company from one hemorrhaging money each quarter into a leaner business that is generating more than enough cash flow to cover spending and further reduce debt.
CLF Net Financial Debt (Quarterly) data by YCharts.
Even though Cliff's business has changed dramatically over the past few years, the market still has this stock priced like it's still that highly indebted iron ore producer on the verge of collapse. This suggests that there is a lot of opportunity in this stock today. Cliffs will always be a one-trick pony that will wax and wane with the price of iron ore, but it is much better positioned to handle those market swings and has immense potential should we see even a modest uptick in iron ore prices.
A golden growth opportunity
Matt DiLallo (Sandstorm Gold): Investors who are looking for a potentially high-return opportunity in the mining sector should consider Sandstorm Gold. The gold streaming and royalty company offers a very compelling balance between cash flowing assets and development upside that could deliver solid returns in a stable gold price environment and accelerated gains if prices rise.
Sandstorm Gold currently own 20 producing assets primarily in North and South America. According to its estimates, those streaming and royalty agreements should generate about $50 million in cash flow this year given its projections that gold will average $1,200 per ounce. Meanwhile, the company anticipates that its cash flow will rise to $65 million over the next five years if gold doesn't budge due to the embedded growth of its streaming and royalty contracts. However, if gold were to rally, its cash flow would surge. For example, at $1,600 an ounce, cash flow would top $100 million in five years.
That said, this growth is just the tip of the iceberg for Sandstorm Gold's potential. The company's partners have 10 more projects currently in development that have not been included in its cash flow forecast. In the meantime, it has contracts on more than 100 exploration properties, a quarter of which are in advanced stages, that represent significant untapped upside for Sandstorm Gold. In addition, there's embedded growth within its current portfolio because it has the right of first refusal and royalty buyback rights on more than 30 contracts. Finally, with no debt and ample liquidity, the company has plenty of capacity to acquire more streaming and royalty assets to bolster its portfolio.
