What are we looking for?
Gold may get all the glory, but if you want to build an economy, it’s all about base metals. In order of global consumption, the most widely used are iron ore, aluminum, copper, zinc, lead, nickel and tin. Today, my colleague Rob Belanger and I look at the global base metal sector.
We started with companies greater that $1-billion in market capitalization, and we sorted them from the largest to the smallest.
The EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization) is one of the most commonly used valuation metrics. We are looking for a low number.
Free cash flow yield compares the free cash flow per share that a company is expected to earn against its market price per share. Our companies had to have a positive FCF yield, and the lower the ratio, the less attractive the investment.
Operating margin is a measurement of what proportion of a company’s revenue is left over after paying for variable costs of production such as wages, promotion, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Our companies had to have an operating margin of greater than 10 per cent.
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. This metric gives an idea as to how efficient management is at using its assets to generate earnings. Only companies with a positive ROA are included.
Return on equity (ROE) shows whether a company is a profit creator or a profit burner, and if it is growing profit without pouring new capital into the business. Companies had to have a positive ROE.
What did we find?
Only one company outperformed the averages in all five categories. African Rainbow Minerals is a leading South African miner of iron ore, copper and nickel. In 2005, the company listed its non-South African assets on the TSX under the name of Teal Exploration & Mining. Half the company was sold to Vale SA in 2006 and Teal was delisted.
Conspicuous by their absence are Cameco, First Quantum Minerals Ltd., HudBay Minerals, Capstone Mining, Vale SA, and Alcoa, which all failed in one category or another.
Before investing in any of these companies, you are well advised to contact an investment professional or conduct further research.