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.
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
3. Profitability
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 | |
|---|---|---|---|
| Hecla | 2.7 | 0 | N/A |
| Teck | 3.3 | 0.24 | 11 |
| 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.
Criteria number 2: low production costs
Hecla Mining Company (NYSE:HL) mining is one of the most efficient independent mining companies in the US.
| Company | Cash cost per oz. of Silver producer | Overall net profit margin |
|---|---|---|
| Hecla | $7.02 | 5% |
The company is able to produce an ounce of silver for $7.02, indicating that unless the price of silver drops below this level the company will continue to turn a profit. Overall, the company makes a 5% profit margin on its operations, which seems small but considering some of the biggest miners in the world are currently loss making, Hecla Mining Company (NYSE:HL) is doing well.
Teck Resources (USA) (NYSE:TCK) is primarily a producer of coal and copper, both of which have seen significant price declines during the past year.
| Company | Per pound cash cost of Copper produced | Per ton cash cost of Coal produced | Overall net margin |
|---|---|---|---|
| Teck | $2.06 | $47 | 9.5% |
However, with a per-ton-cash-cost of $47 for coal, Teck Resources (USA) (NYSE:TCK) continues to turn a profit as the company reported that it sold thermal coal at an average of $160 per ton during 2012. Additionally, the company has reduced its production cost of copper to $2.06 per pound, after cutting costs during 2012. On average the company sold copper for $3.20 per pound during 2012.
Overall the company has a net income margin of 9.5%, showing that Teck Resources (USA) (NYSE:TCK) is still a cash generative coal miner when so many of its peers a loss making.
Stillwater Mining Company (NYSE:SWC) is mainly a producer of high value precious metals such as platinum and palladium.
| Average cash cost | Average Sales price | Overall net margin |
|---|---|---|
| $523 | $926 | 7.8% |
Thanks to wildcat strikes in South Africa during 2012, which drove up platinum prices, the US-based Stillwater Mining Company (NYSE:SWC) managed to achieve an average selling price of $926 per troy oz. for its products during 2012, which was nearly double the company’s average cash cost per ounce. This made Stillwater Mining Company (NYSE:SWC) highly cash generative, and the company has a net income margin of just under 8%–strong considering the state of the mining industry.
Criteria number 3: controls on CAPEX spending
The single biggest failing of the mining industry during the past few years has been excessive spending and expansion while profits were high. However, now spiraling costs and project overruns are coming back to haunt big spending miners.
Controlled CAPEX spending in the past is a key indicator of how the company will spend cash the future.
Hecla Mining Company (NYSE:HL)’s spending:
| Metric | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|
| Operating income | 115 | 198 | 70 | 69 |
| CAPEX Spending | 25 | 67 | 88 | 113 |
| Over/under spend | +90 | +131 | -18 | -44 |
Figures in $US millions
Helca’s CAPEX spending has been well within its means during the past four years. The company did not overspend during the boom years of high silver prices, instead keeping the profits back to build its cash balance.
Teck’s spending:
| Metric | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|
| Operating income | 3,290 | 3,270 | 3,960 | 2,370 |
| CAPEX Spending | 590 | 810 | 1,240 | 1,810 |
| Over/under spend | +2,700 | +2,460 | +2720 | +560 |
Figures in $US millions
Teck Resources (USA) (NYSE:TCK) made the same choice and spent wisely during the boom years, and even now the company continues to spend within its budget. The group has built up a solid cash balance due to its fiscal prudence, which will give it an edge over its peers during tough times.
Stillwater Mining Company (NYSE:SWC)’s spending:
| Metric | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|
| Operating income | 60 | 124 | 220 | 104 |
| CAPEX Spending | -40 | -118 | -103 | -112 |
| Over/under spend | +20 | +6 | +117 | -8 |
Figures in $US millions
Following the trend, Stillwater also kept its spending under check during the boom years and the company shows a good display of solid fiscal management and foundations for the future – holding back excessive cash generation for future rough patches.
Overall
Although this is only a short run-down of these three companies, it highlights their key strengths. All three companies have strong balance sheets, remain highly cash generative, and have kept spending under control in the past, indicating that they will spend wisely in the future.
While the mining industry as a whole is in turmoil, Teck, Stillwater, and Hecla Mining Company (NYSE:HL) could provide decent returns for investors while other miners flounder.
The article These Three Miners Could Offer Good Future Returns originally appeared on Fool.com.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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