Gold and copper prices continue to get hammered, making things extremely difficult for the major metals and mining stocks including Freeport-McMoRan Copper & Gold (FCX 2.13%) and Southern Copper Corp. (SCCO 0.30%). In all, gold's 2013 losses now top 20%, and prices are only slightly above their three-year lows. Copper, meanwhile, is on a similar trend lower, having lost 30% of its value since 2011.
With this in mind, the unfavorable economics of precious metals might normally make the entire industry untouchable. At the same time, savvy investors may be understandably wondering whether now is the perfect time to buy.
All that glitters is not always gold
Gold's steep fall this past year has already been felt in the earnings reports of the major global miners, and it's likely that further impacts will be felt as well. The Federal Reserve is likely to begin tapering off its massive quantitative easing, a consequence of which would be higher interest rates, and that's not good for gold prices.
What's more, industry economics aren't exactly favorable right now, as the surge in global production known as the commodities 'super-cycle' over the past decade has resulted in a glut of supply. This means further downside in the price of copper is expected, with analysts at a Chinese state-owned mining and trading group pegging a likely floor at $6,500 per tonne, compared to current prices of $7,100 per tonne.
Normally, that would mean investors would be wise to stay away from miners. However, the best management teams are often able to steer their businesses through tough times, and that's exactly what appears to be happening at Freeport-McMoRan Copper & Gold. Freeport's underlying performance hasn't been as dire as some might fear given the overhanging concerns regarding copper and gold. The company's total revenue and operating cash flow declined just 2% and 6%, respectively, during the first half of the year.
Meanwhile, Freepor-McMoRan received an additional shot in the arm in the form of an analyst rating. Analysts with Goldman Sachs recently reiterated the company as its top pick within the metals and mining sector, citing its positive long-term growth outlook despite the near-term pressures. Specifically, Goldman notes the company's potential in the energy market, and with Freeport's recent merger and acquisition activity in mind, it's hard to argue with that assessment.
Freeport's $19 billion acquisitions of Plains Exploration and McMoRan Exploration give it a huge amount of oil and gas assets and allow it exposure to the fast-growing production side of the U.S. oil and natural gas markets.
For its part, Southern Copper Corp's second-quarter net sales and net earnings fell 15% and 34%, respectively, year over year. And yet, it's important to note that the company is largely not winding down production, even in this tough metals and mining environment. Southern Copper Corp's production of copper fell just 4.9% in the second quarter, and its production of molybdenum dropped only slightly. Chairman German Larrea reiterated his company's commitment to investment and production, saying that "turbulence in the current metals market" won't deter Southern Copper from realizing its long-term strategic priorities.
An international play to consider
If you're an investor who values yield along with finding strong businesses, then Vale S.A. (VALE 1.10%) should be on your radar. Vale is headquartered in Brazil and, like Freeport and Southern Copper, continues to ramp up production, clearly believing in its own future. Vale's copper and coal production reached all-time highs in the second quarter, and the company produced the most nickel in five years.
Plus, Vale's nearly 5% yield towers above both its competitors and the roughly 2% yield on the broader market. High dividend yields are especially valuable when a company encounters a harsh business climate, as Vale and the other precious metals producers are currently experiencing. Vale's juicy yield represents a meaningful downside protection, which will compensate investors handsomely in exchange for enduring tough operating conditions.
As a result, as stock prices of global miners fall, their dividend yields are rising. That means that Vale's 5% payout, and Freeport's 3.7%, have turned into surprising sources of yield. On the whole, Freeport, Vale, and Southern Copper, while struggling presently, still represent strong businesses with capable management teams that are keeping their eyes on the future. There's a light at the end of the tunnel for global miners, and current prices look to be attractive entry points.
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