The Fundamental Case for MinersOctober 05, 2017
Miners of all sorts have been put in the penalty box in recent years for massively over-investing from 2008-2013 on the thought that China’s infrastructure investment boom, and the commensurate demand for raw materials, would last forever. The over-investment and excess supply drove commodity prices lower and with it the performance of miners. For example, from the beginning of 2011 copper miners are down 56% and gold miners are down 62%. Over the same period the S&P 500 is up 103% and the MSCI World Index is up 69%. But, the fundamental picture has changed dramatically and now mining companies may be one of the most attractive groups across the global equity markets from a classical value perspective. Indeed, capital expenditures are down 40% from their peak, cash is starting to accrue on the balance sheet, and valuations are close to decade low levels. A quick and dirty analysis of the attributes of gold, copper and diversified mining dub-industries follows.
From 2006 through 2013 capital expenditures are a percentage of sales rose from 21.5 to 38.1% on average for the mining industries, creating massive over capacity. But, capex as as a percent of sales has fallen in each of the last three years and now stands at a decade low.
We observe the same story for capex as a percent of operative cash flow, except this ratio peaked in 2011 on average for these groups. Currently capex as a percent of operating cash flow stands at 2008 levels and is has granted these companies significantly more flexibility.
It’s no wonder then that cash as a percent of capital has risen every year since 2014 after falling precipitously from a peak in 2009.
Net debt levels are up from recent lows, but at just 11% on average, these industries are hardly over levered.
Meanwhile valuations are about as attractive as one could hope for. Companies in these industries sell for 1.6x book value currently compared to 4.4x a decade ago at 1.7x in the nadir of the 2008 recession.
The price to sales multiple is 3.1x on average compared to 7.8x a decade ago and 6x in 2008.
Finally, price to normalized cash flow (we like to use normalized cash flow figures for cyclical industries like mining) is just 11.3x compared to nearly 30x back in 2006 and 16.1x in 2008.