Deep Discounts in Miners: Rio Tinto and Lundin Mining

10/24/2017 5:00 am EST

Focus: COMMODITIES

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

With this year’s fourth quarter around the corner, we maintain a positive view on the miners. The majority of our preferred global macro indicators are holding up well, especially GDP growth and manufacturing PMIs, says Elliott H. Gue, editor of Capitalist Times.

Furthermore, the mining sector still trades at a deep discount to the market, even after the recent strong rally. And because a lot of metal prices still show signs of strength, corporate earnings should soon follow.

As we’ve noted before, mining companies have been cutting capital expenditures faster than a lot of investors expected. And that’s while demand has surprised on the upside.

Companies have also substantially cut on the exploration front. Exploration budgets have fallen from around $21 billion in 2012 to around $7 billion as of the end of last year.

As a result, replacing current reserves is increasingly difficult. In some cases, the strong demand is pushing prices higher faster than investors expected.

London-based Rio Tinto (RIO) remains the favorite major mining company to own. Two new developments have made the case for buying the stock stronger.

The first is the positive boost it receives from the sustainability iron ore prices show in the $75 to $80 per ton range. The strength of this range is due to fundamentals, although they may not continue into 2018. For now, it’s supporting earnings in a big way.

The second is the bidding war that took place between China’s Yancoal and Glencore (GLNCF) for some Rio Tinto’s best coal assets. The Chinese proved to be the winners with a final offer of $2.7 billion and more than $250 million in royalties for the next five years.

In addition, Rio Tinto continues its buyback share program and doing a solid job managing its debt. As of the middle of the year, net debt was $7.6 billion, down from $9.6 billion at the end of 2016. Rio Tinto remains a buy up to $48.

I initially recommended Canada-based Lundin Mining (Toronto: LUN) because of the exposure it offers to rising copper prices and the stability in the countries it operates.


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Even though copper prices may take a breather going forward, the company’s strong balance sheet, including net cash of $1.1 billion, and strong free cash flows are big positives. Stay with the stock.

The use of the company’s cash may prove to be the biggest catalyst for the stock in the near term, especially since cash levels should increase as free cash flows remain strong and take care of capex, dividends and the like.

Given Lundin’s history, management will look for an acquisition. Keep in mind that buying non-core assets from bigger companies created the company.

And Lundin has a history of creating value out of merger and acquisition deals. Even now, management wants to increase volume by more than 50 percent in the next two to three years. Therefore, acquisitions will play a big role.

Another possibility is that the company could increase dividends -– a big positive for the shares going forward.
For now, Lundin remain a buy up to CAD 9.

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