Vale’s peers face difficulties but they will survive too
I will not discuss Rio Tinto and BHP Billiton in this article, as I have already done so previously. Instead, let us take a look at Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) and Southern Copper Corp (NYSE:SCCO). Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) was hit hard by China’s lack of demand for copper and other commodities. That has not stopped Freeport from acquiring Plains Exploration and Production Company for $6.2 billion, nor did it stop the company from trying to strike a deal to acquire McMoRan. These additional properties will help Freeport gain access to oil and gas along the Gulf Coast, the Rocky Mountains, California and the Gulf of Mexico. This diversification is very different from what Vale has been doing.
Vale has tried to divest the properties and businesses that weren’t part of its core focus. Such divestitures have helped Vale clear a lot of its debts and trim down. On the other hand, Freeport is acquiring new projects despite weakened demand in China. The take-home message is that, whether a company chooses to trim down or diversify, conditions in China will not affect Vale’s shares in the long run. Freeport trades at $30 and has an impressive price to sales ratio of 1.63. Its profit margin is very high, at 16.26% and its operating margin is almost 30%, suggesting an overall high rate of profitability. Freeport is an impressive option.
Southern Copper Corp (NYSE:SCCO) sells its commodities to China as well. The company has had consistently impressive revenue and profit margins. With reduced demand in China for metals, though, even Southern Copper saw its numbers dwindle. However, the Chinese premier’s reassuring words bode well for Southern Copper. Other than copper, the company also produces coal, silver, lead, zinc and other metals. China’s growing demand will help Southern Copper find buyers for these other metals too.
Southern Copper trades at $30 and has a market cap of $25 billion. It has an enterprise value of $28 billion and is one of the largest mining companies in the world. Southern Copper has a surprisingly high rate of profitability, with a profit margin of 28% and an operating margin close to 50%.
Southern Copper has a price-to-sales ratio of 3.82 and a price-to-book ratio of 4.89. However, the company’s PEG ratio is 0.93, which suggests that it is fairly valued. A lower PEG ratio is better for investors, whereas a higher PEG ratio is considered to be an expensive investment. A PEG ratio more than 1 would have been considered to place the company in overpriced territory.