Some Mining Stocks Still Glitter

04/16/2007 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, editor of the Utility Forecaster, says three major mining companies have been excellent performers over the last five years but should continue to do well, as demand for commodities remains strong.

Although gold, silver, copper and other metals—and the companies that dig them out of the ground—have their market moments, they’ve been dead money for most of the past century.

There are, however, [several major mining stocks] that should turn the head of even the deepest skeptic: not only have they thrown off an average gain of 237.9% during the past five years, but they’re in good shape for a repeat performance with strong mining businesses backed by solid finances, rich reserves and deep technical expertise. Today, the trio is at the peak of its power and reaping the most of rising global demand for myriad products

Originally focused on South Africa’s gold mines, Anglo American Plc (NASDAQ: AAUK) has operations on every continent except Antarctica. The product line includes coal, copper, platinum, construction aggregates, forest enterprises, nickel, zinc and diamonds. Anglo American’s 2006 operating profit soared 54 % on record output of its gold, platinum, base metals and ferrous metals and some $583 million in cost savings.

Management reports solid demand growth for its products in a wide number of markets that promise to lift earnings in 2007 and beyond. We’d prefer a higher dividend to the planned $10.5 billion in stock buybacks. But the twice-annual dividend of more than 3% is generous for a mining company. Anglo American Plc is a buy up to $26. (It closed above $27 Friday—Editor.)

Australia-based BHP Billiton’s (NYSE: BHP) mining output features aluminum, coal, iron ore, diamonds, gold, titanium, nickel and copper. It’s even in the oil business. The company operates primarily in its home market of Australia, but its operations span South America, Africa and Canada as well.

A planned $17.5 billion investment in some 29 new projects across the world should keep output growing in 2007. BHP also plans $10 billion in stock buybacks, or around 8% of shares outstanding. We’d rather see the money paid out in a larger dividend. But the investment all but assures more earnings gains ahead for BHP, which even now trades for less than 10x profits. Buy BHP Billiton up to 50. (It traded around that Friday—Editor.)

Also based in Australia, Rio Tinto (NYSE: RTP) is the most diverse of all, mining aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium and a score of other minerals. Operations are global but are focused particularly in mineral-rich New Zealand, South Africa and Indonesia.

As with Anglo and BHP, Rio’s management is anticipating a slower year in 2007, particularly in major commodity consuming markets like China. A 30% dividend increase and well-developed plans to acquire smaller mining companies, however, should provide solid support to earnings and shares alike. The stock is priced at nearly 30x earnings, making it the most expensive of our picks. Consequently, despite its great strengths, Rio Tinto is a buy only on a dip to $190 or lower. (It closed at $247 Friday—Editor.)

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