Over the last year, commodities have outperformed stocks and bonds by a significant degree. This bull market should continue as supply and demand fundamentals remain supportive.
Despite strong price appreciation, CAPEX has remained quite low. So far, companies are using their increased cash flow to pay off debt and return money to shareholders via buybacks and dividends. Until we see a meaningful response on the supply side, dips should be bought.
Of course, commodities are a broad category, but some of the best opportunities can be found in miners of industrial metals. One industrial metal with particularly strong fundamentals is zinc. Zinc is used to galvanize steel and iron or for alloying. There is even hope that it can be used instead of lithium for EV batteries which would bring tremendous cost and environmental benefits. Russia supplies about 7% of the world’s zinc, so zinc prices are up 20% since the buildup of troops on the Ukrainian border began.
Today, I want to talk about Nexa Resources (NEXA), which is one of the top zinc producers in the world. Read on to find out why it’s my stock of the week…
Company Background
NEXA produces a variety of metals including zinc, silver, gold, and copper. But, zinc is its primary source of revenue. Another source of revenue is its smelting operation. It currently owns and operates 5 underground polymetallic mines that are located in Brazil and Peru.
Prior to September 2017, the company was known as VM Holding S.A., before it changed its name to Nexa Resources S.A. The company was founded in 1956 and is based in Luxembourg City, Luxembourg, and is a subsidiary of Votorantim S.A. In its last quarter, the company produced 66,000 tons of zinc. Its cost of production was $45 per ton. Of course, the company’s earnings have exploded due to the bull market in zinc.
Zinc Supply and Demand
Although zinc prices have backed off in the last couple of weeks, they remain within striking distance of 14-year highs due to strong industrial demand and lower production due to the coronavirus. Another recent catalyst for zinc is that smelting operations in Europe are running at below capacity due to high energy prices.
In 2022, analysts are expecting zinc demand to increase by 2.2% with the primary driver being increased auto production as the chip shortage eases. Recent coronavirus outbreaks in Asia have dented demand in Q1, but this should increase as the virus burns out.
Over the next 2 years, analysts are expecting output to increase and normalize at higher levels. But demand should increase as well due to strength in the industrial economy, increased infrastructure spending, and more investment in offshore energy production.
GARP
Due to zinc prices rising from under $2,000 per ton to over $4,000 per ton over the last 2 years, it’s not surprising that NEXA’s earnings are booming. In its last quarter, the company reported $0.48 per share in earnings, a 182% increase from last year. The company’s revenue was up 20%.
These figures should only increase given that zinc prices are up 20% YTD. For 2022, analysts are forecasting $2.32 in EPS and $2.93 billion in revenue. And, this forecast is based on zinc prices averaging $3,600 for the year, while we are already more than 10% above these levels which means more upgrades are likely.
This type of performance in 2022 also means that the stock is very attractively priced with a forward P/E of 4. The company has a market cap of $1.4 billion and nearly $800 million in cash. It also pays a generous dividend of 3.5% which it has maintained since becoming public in 2014.
This makes NEXA an excellent ‘growth at a reasonable price’ (GARP) stock.
POWR Ratings
NEXA’s attractive valuation provides a downside cushion. Earnings growth should continue due to rising zinc prices. And, zinc prices should continue to be supported as long as Europe is dealing with high electricity prices.
In the intermediate-term, more supply of zinc should be hitting the market due to more mines coming back online and transportation bottlenecks easing. This could certainly lead to a pullback or some profit-taking.
But in the long-term, demand should continue to grow given that zinc is essential for so many uses. And, the world has underinvested in new production. Historically, commodity bull markets don’t end until there is a sufficient supply response.
These strong fundamentals are reflected in NEXA’s POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system. B-rated stocks have posted an annual performance of 21.1%, outpacing the S&P 500’s annual 8.0% performance.
It’s also a standout in terms of component grades, NEXA has a B for Value due to having a P/E of 11 which is half of the S&P 500, and one of the top price-to-growth (PEG) ratios in the market. The stock is ranked #11 of 47 stocks in the Miners – Diversified industry. Click here to see the complete POWR Ratings for NEXA.
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NEXA shares closed at $9.36 on Friday, up $0.03 (+0.32%). Year-to-date, NEXA has gained 24.07%, versus a -12.99% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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