Mining plays a pivotal role in a nation's economic development. As the global shift towards renewable energy accelerates, a surge in demand for critical minerals required for clean energy technologies, combined with government funding, could significantly boost the mining industry’s growth.
Given this backdrop, mining stocks Fortescue Metals Group Limited (FSUGY) and Amerigo Resources Ltd. (ARREF) could be wise portfolio additions now, while it may be advisable to steer clear of fundamentally-weak stock Lithium Americas Corp. (LAC).
Before analyzing these stocks, let's examine the forces shaping the mining sector.
Roughly half of the global GDP relies on natural resources, without which the other half could not be sustained. The mining sector, a crucial conduit for natural resource extraction, is integral to diverse sectors, including construction, manufacturing, technology, and energy. It furnishes the vital materials necessary for sustaining our households, businesses, and infrastructural operations.
Countries worldwide are significantly ramping up investments to facilitate the shift to a clean and digital-centric economy. This trend has ignited a surge in global demand for critical minerals, including but not limited to copper, lithium, nickel, cobalt, and rare earth elements, which form the building blocks of several manufactured products.
For instance, the escalating demand for lithium in the EV and consumer electronics industries has opened new vistas for the mining sector. Global lithium demand is expected to outmatch production in 2023 by around 3%. According to Li-Bridge, demand for lithium batteries in the United States alone is expected to surge more than six times, culminating in $55 billion annually by the close of the decade. The global lithium market is anticipated to reach $10.60 billion by 2028, growing at a CAGR of 13.4%.
On the other hand, mining companies are increasingly embracing technological advancements, such as cloud computing, AI, and machine learning, to optimize resource extraction, improve operational efficiency, and reduce environmental impact.
Furthermore, governmental agencies are promoting Foreign Direct Investments (FDI) in the mining sector and offering funds, which could keep the industry fortified. The global mining market is expected to reach $2.78 trillion by 2027, growing at a CAGR of 6.7%.
Therefore, investing in quality miner stocks FSUGY and ARREF could be wise. However, fundamentally weak stock LAC could be best avoided now.
Stocks to Buy:
Fortescue Metals Group Limited (FSUGY)
Based in East Perth, Australia, FSUGY engages in the exploration, development, production, processing, and sale of iron ore. It explores copper and gold deposits and also provides port towage services. In addition, the company holds a portfolio of properties in Ecuador, Argentina, Colombia, Peru, Chile, Brazil, Portugal, and Kazakhstan.
Recently, FSUGY’s shipment from its newly built Iron Bridge operations to Vietnam would be the first time the company has exported a high-grade magnetite product. Iron Bridge demonstrates FSUGY’s pioneering innovation, signifying the first time the company has produced a wet concentrate product, which is transported through a 135 km specialist slurry pipeline where dewatering and materials handling occurs to create a high-grade magnetite product.
FSUGY’s CEO, Fiona Hick, said, “High-grade magnetite product will play an important role in lowering emissions in the steel industry, and Fortescue is moving at pace to ensure we are at the forefront of developing green steel technologies.”
In July, FSUGY’s segment Fortescue Future Industries (FFI), made its first major move in the United States following the passage of the Inflation Reduction Act by investing $24 million to acquire a 100% interest in Phoenix Hydrogen Hub, LLC (PHH). This investment has the potential to create new industrial jobs for Americans.
FFI’s CEO Mark Hutchinson said, “FFI is actively expanding its U.S. presence and strengthening its position as a leading global developer of green energy production and technology. We are committed to helping turn North America into a world-leading global green energy producer.”
FSUGY pays a $2.57 per share dividend annually, translating to an 8.38% yield on the current share price. Its four-year average dividend yield is 12.38%. The company’s dividend payouts have grown at a CAGR of 7.4% over the past three years and 35.5% over the past five years.
FSUGY’s trailing-12-month levered FCF margin of 23.20% is 556.6% higher than the industry average of 3.53%. Likewise, its trailing-12-month cash from operations of $746 billion is significantly higher than the industry average of $353 million.
FSUGY’s forward EV/EBITDA and EV/EBIT of 4.99x and 5.98x are 36.5% and 49.5% lower than the industry averages of 7.85x and 11.85x, respectively.
For the six months that ended December 31, 2022, FSUGY’s operating sales revenue amounted to $7.84 billion, while gross profit stood at $3.89 billion. During the same period, its operating profit and net profit after tax stood at $3.46 billion and 2.37 billion, respectively.
In addition, its net cash flow from operating activities and cash and cash equivalents at the end of the period came in at $2.95 billion and $4 billion, representing 38% improvements year-over-year. Also, as of December 31, 2022, its total current liabilities stood at $2.10 billion, compared to $2.42 billion as of June 30, 2022.
Analysts expect FSUGY’s revenue for the fiscal year ended June 2023 to be $16.80 billion, while for the fiscal year ending June 30, 2024, its revenue is expected to come to $15.17 billion.
The stock has gained 25.4% over the past year to close the last trading session at $32.24. Over the past three months, the stock gained 19%.
FSUGY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Value, Stability, and Quality. Among the 42 stocks in the Miners – Diversified industry, it is ranked first.
Click here to see FSUGY’s ratings for Growth, Momentum, and Sentiment.
Amerigo Resources Ltd. (ARREF)
Headquartered in Vancouver, Canada, ARREF produces and sells copper and molybdenum concentrates from Codelco’s El Teniente underground mine in Chile through its Minera Valle Central S.A. (MVC) subsidiary.
Recently, ARREF announced that Minera Valle Central’s (MVC) normal operations had been resumed, which were temporarily disrupted following a significant climatic event that affected central Chile. The MVC plant was reconnected to Chile’s central power grid on July 21, 2023, enabling MVC to resume normal operations processing fresh and historic Cauquenes tailings on July 22, 2023.
On June 20, backed by its strong financials, ARREF paid its shareholders a quarterly dividend of C$0.03 per share. The company’s annual dividend of $0.09 per share translates to a 7.76% yield on the prevailing prices, while its four-year average dividend yield is 2.66%.
In the fiscal second quarter of 2023, ARREF returned $3.7 million to shareholders through the company’s seventh consecutive quarterly dividend of Cdn$0.03 per share, and $0.8 million was returned through the purchase of 0.7 million common shares.
ARREF’s forward EV/Sales and Price/Sales of 1x and 1.11x are 36.2% and 5.7% lower than the industry averages of 1.57x and 1.18x, respectively. Moreover, its forward EV/EBIT multiple of 10.41 is 12.1% lower than the industry average of 11.85.
ARREF’s trailing-12-month levered FCF margin of 8.01% is 126.8% higher than the industry average of 3.53%. Likewise, its trailing-12-month EBITDA margin of 22.30% is 28% higher than the industry average of 17.42%.
For the fiscal second quarter of 2023, MVC produced 13.63 million pounds (M lbs) of copper, with 65% of production coming from fresh tailings. Copper production to the end of May 2023 was trending 4% over guidance. For the same quarter, its molybdenum production was 0.3 M lbs, while its year-to-date molybdenum production of 0.6 M lbs was 10.3% over guidance.
ARREF’s revenue for the fiscal first quarter that ended March 31, 2023, stood at $52.65 million, while its EBITDA stood at $18.46 million. During the same quarter, its net income and earnings per share were $9.09 million and $0.05, respectively. Its cash and cash equivalents stood at $43.92 million as of March 31, 2023, compared to $37.82 million as of December 31, 2022.
The consensus revenue and EPS estimates of $171.12 million and $0.07 for the fiscal year ending December 2023 reflect 1.8% and 42.9% increases year-over-year, respectively. Moreover, it surpassed the revenue estimates in three of the trailing four quarters, which is impressive.
Over the past year, ARREF’s shares have gained 33.7% to close the last trading session at $1.19. The stock has gained 22.7% year-to-date.
It’s no surprise that ARREF has an overall rating of B, which equates to Buy in our proprietary rating system.
It has a B grade for Value and Quality. Within the same industry, it is ranked #2.
In addition to the POWR Ratings we’ve stated above, we also have ARREF’s ratings for Growth, Momentum, Stability, and Sentiment. Get all ARREF ratings here.
Stock to Avoid:
Lithium Americas Corp. (LAC)
Headquartered in Vancouver, Canada, LAC is a resource company in the United States and Argentina. The company explores lithium deposits.
LAC’s trailing-12-month ROCE, ROTC, and ROTA are negative 5.72%, 4.12%, and 4.05%, compared to the industry averages of 10.60%, 6.08%, and 4.62%, respectively. Its trailing-12-month cash from operations of negative $66.30 million compares to the industry average of $353 million.
LAC’s forward EV/Sales and Price/Sales of 30.02x and 34.50x are significantly higher than the industry averages of 1.57x and 1.18x, respectively. Moreover, LAC’s forward EV/EBIT multiple of 41.88 is 253.5% higher than the industry average of 11.85.
LAC’s expenses for the fiscal first quarter that ended March 31, 2023, stood at $7.60 million. Its net loss and loss per share stood at $6.40 million and $0.04, respectively. The company’s net cash used in operating activities widened 6% year-over-year to $19.03 million. Moreover, as of March 31, 2023, LAC's total current liabilities stood at $60.81 million, compared to $19.65 million as of December 31, 2022.
LAC’s EPS for the fiscal year ending December 2023 is expected to remain negative at $0.26, while its revenue is expected to come at $89.88 million. For the quarter that ended June 2023, its EPS is expected to decline 112.3% year-over-year to negative $0.26, while its revenue is expected to come at $13.22 million.
Over the past year, the stock has lost 16.8% to close the last trading session at $19.45. The stock has declined 12.7% over the past six months.
LAC’s POWR Ratings reflect its grim outlook. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system.
It is ranked #40 within the same industry. It has a D grade for Growth, Value, and Stability and an F for Quality.
We have also given LAC grades for Momentum and Sentiment. Get all LAC ratings here.
What To Do Next?
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FSUGY shares were unchanged in premarket trading Wednesday. Year-to-date, FSUGY has gained 19.60%, versus a 19.99% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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