As I do most of my trading and investing on the London Stock Exchange, I like to think that I know something about resource stocks; after-all, London is the preferred place for resource companies to list in the world, and a significant part of my portfolio is composed of miners and mining equipment company’s.
The problem is that, with the commodity market stuck in a bear market, resource stocks are being shunned in favor of consumer goods companies. Furthermore, due to the nature of their product, recourse stocks are completely unpredictable and at the mercy of capital markets more than any other listed company, as they have no ability to price their own products like a consumer goods company, which can raise prices to offset rising production costs, something mining company’s cannot do.
Personally I believe there are four things that are essential to the success of a mining company:
1. A strong balance sheet – obvious, but most of the time it’s not there
2. Low production costs
4. Controls on CAPEX spending – no under or overspending.
So, based on these criteria three stocks have caught my attention. Hecla Mining Company (NYSE:HL), Teck Resources (USA) (NYSE:TCK) and Stillwater Mining Company (NYSE:SWC) are three mining companies that are on my shopping list.
Criteria number 1: a strong balance sheet
|Quick Ratio||Net debt to Equity||Interest cover by EBITDA|
|Stillwater||5.8||0||7.7 Q1 2013|
I am using the quick ratio here to evaluate current liquidity as the current ratio will include inventories, the true value of which will be distorted by highly volatile metals prices.
All three mining companies have strong quick ratio’s, indicating that they are able to cover all of their liabilities due within twelve months with their available assets. Furthermore, Teck Resources (USA) (NYSE:TCK) is the only company with a net debt position. Teck’s net debt is only 24% of shareholder equity, and interest costs are covered eleven times by EBITDA.
Stillwater Mining Company (NYSE:SWC) has a small amount of debt, but the company’s cash position is greater, giving the company a net cash position. Interest costs on Stillwater Mining Company (NYSE:SWC)’s debt are covered 7.7 times by EBITDA.