Miners Surface as Strong Performers

 | Feb 28, 2014 | 12:00 PM EST  | Comments
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Stock quotes in this article:

rio

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abx

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aa

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joy

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bhp

Mining stocks largely sat out the huge rally in 2013. Gold and silver miners have also been putrid performers both in 2012 and 2013. But 2014 has brought different tidings across the mining industry and these stocks are some of the strongest performers in the market.

Some commodity prices have shown decent rises such as the price of gold. The rally is happening, however, despite concerns about global growth. One factor in mining stocks rise was that sentiment on a good portion of the sector was extremely negative to end 2013 and had nowhere to go but up.

The bigger part of the turnaround, though, has been due to the actions taken across the industry. It has been as if everyone realized the commodity 'supercycle' was over or at least slowing down at the same time.

Mining companies have closed unprofitable mines, sold off non-core assets, suspended new projects and slashed capital budgets. This is not good news if you are invested in mining equipment makers like Joy Global (JOY) as their earnings will fall dramatically in 2014. However, these actions will improve margins in the mining sector as marginal capacity will be curtailed.

You can see a microcosm of this cost focus at mining giant Rio Tinto (RIO). Under a new CEO in place for a year, the company has cut debt significantly. Rio Tinto also has sold off non-core assets and is still shopping its Canadian iron ore assets. It also plans to cut capital expenditures nearly 40% over the next two years.

These actions were a core factor in Citigroup upgrading both Rio Tinto and BHP Billiton (BHP) in mid-January which I noted on a blog post that day . The stocks have shot up some 10% since then but I would be a buyer of Rio on any significant pullback in the market. The shares are still reasonably priced at below 10x forward earnings, pay a 2.8% dividend and I like the direction of the company under its new CEO.

I would also add to my position in Alcoa (AA) in any stock market decline. I am a big believer in its turnaround strategy which I profiled recently. The company is selling off unneeded smelting capacity and is seeing increasing demand in its higher margin businesses supplying the automotive and aerospace industries.

Gold and silver miners have had huge runs so far in 2014 but I would be hesitant to add to positions unless precious metal prices continue to climb. I think we need to see some of the cost-cutting efforts start to show up in earnings reports.

I do continue to hold Barrick Gold (ABX) as it is shedding higher cost assets in Africa. The company also has suspended development at its Pascua Luma project in South America, which should reduce its capital budget needs this year to around $2.5 billion from approximately $5 billion in 2013.

It is nice to see the mining industry getting some love from investors for the tough actions the companies in the sector have taken. There are still some relative values in the space and the sector is worth watching to see if it can continue its recent strength.

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