Skip to main content

The Globe and Mail

10 metal stocks likely to outperform in a rally

Base metals are trading higher on the Federal Reserve's decision to expand its asset purchases to boost the economy.

A declining dollar index likely will increase investment demand for metals, especially precious metals.

Additionally, narrowing inventory levels will continue to support higher metals prices. The copper inventory on the London Metal Exchange has hit 52-week lows at 350,250 tonnes, and the metal has risen to 31-month highs.

Story continues below advertisement

Demand for copper will outstrip supply by 367,500 tonnes by 2011, according to median estimates of 12 analysts polled by Bloomberg, while the International Copper Study Group estimates a deficit of 435,000 tonnes during 2011.

Meanwhile, aluminum producers may have to boost output by almost two-thirds to meet 5.3 per cent demand growth over the next decade, Bloomberg reports, citing a statement by Rio Tinto. In addition, the launch of new commodity ETFs will continue to boost metals stock prices.

Given these fundamentals, metals stocks likely will continue to outperform broader markets in December. During November, the S&P 500 Index gained 3.7 per cent, while the SPDR S&P Metals and Mining ETF surged 9.1 per cent.

The following 10 stocks have high betas. In other words, they are more volatile than the stock market. That means they likely will outperform their peers in a rally. The stocks are listed from lowest beta value to highest.

AK Steel is a producer of flat-rolled carbon, stainless and electrical steels, primarily for the automotive, appliance, construction, and electrical power generation and distribution markets.

High steel prices are necessary for AK Steel to be able to maintain its profit margins, as the company is not integrated for iron ore and coking coal supplies. Last week, the company announced price increases for carbon steel products on increased demand and higher raw material prices. Domestic steel prices will have to rise further to offset anticipated increases in raw material costs, which have been generating volatility in the stock, giving it a high beta value.

Another reason for the high beta value is that the company's dividend yield of 1.42 per cent is lower than Nucor's 3.70 per cent, Worthington Industries' 2.81 per cent, and Steel Dynamics' 2.13 per cent. Even though U.S. Steel has a lower dividend yield - 0.46 per cent - its stock has a lower beta because of the company's integrated character. Being a nonintegrated steel maker, AK Steel is a more volatile stock subject to the impact of raw material prices.

Story continues below advertisement

AK Steel is expected to lose 64 cents a share during 2010, and report earnings of 42 cents a share in 2011, in comparison with a loss of 68 cents a share in 2009, according to analysts polled by Bloomberg. Over the past year, the stock declined around 26 per cent, while its peers gained around 32 per cent, underscoring the impact of increasing raw material costs.

Of the 13 analysts covering the stock, two recommend buying it, 10 advise holding it and one advises selling it.

Haynes International is a producer of nickel- and cobalt-based alloys in sheet, coil and plate forms.

The stock's price movement depends on the end market rather than the movement in metal prices. Demand from the aerospace, defense, and industrial markets is pivotal to revenue generation.

The stock likely will provide attractive returns to investors on an improving backlog, robust margins, and strong capital and operational efficiency. During the third quarter, utilization rates jumped by 10 per cent quarter over quarter, while the backlog grew 6 per cent.

Analysts polled by Bloomberg expect the company to report earnings of $1.09 a share for 2010 and $2.33 a share for 2011, a significant turnaround from the loss of $3.09 a share registered in 2009.

Story continues below advertisement

Over the past year, the stock advanced about 55 per cent, while its peers gained only 33 per cent. Of the seven analysts covering the stock, four recommend buying it and three advise holding it.

Horsehead Holding, a stock with upside, is the largest zinc producer in the U.S. and a leading manufacturer of value-added zinc products.

Horsehead's acquisition of metal-waste recycler INMETCO has added to Horsehead's revenue stability.

Analysts polled by Bloomberg estimate the company will report earnings of 30 cents a share for 2010 and 91 cents a share for 2011, a significant turnaround from a loss of 73 cents a share in 2009.

The stock has surged 63 per cent after testing lows on Aug. 24. Of the six analysts covering the stock, three recommend buying it, two advise holding it and one recommends selling it.

Alumina Ltd. , an Australia-based company, is engaged in investing in bauxite mining, alumina refining, and select aluminum smelting operations through a 40 per cent ownership in Alcoa World Alumina & Chemicals.

Year to date, Alumina surged around 27.8 per cent, ahead of a 21.1 per cent gain in Kaiser Aluminum. Over the same period, Alcoa, Aluminum Corp of China, and Century Aluminum declined 12.3 per cent, 15.9 per cent, and 8.1 per cent, respectively.

Of the 16 analysts covering the stock, seven recommend buying it, eight advise holding it and one rates it a sell.

Mechel is an integrated mining, steel, ferroalloys, and power utility based in Russia. The company unites producers of coal, iron ore concentrate, nickel, steel, ferrochrome, ferrosilicon, rolled products, hardware, heat and electric power.

The stock led the pack of major steel producers with a year-to-date gain of 42.5 per cent, ahead of Worthington's 33.5 per cent, Schnitzer Steel's 26.0 per cent, and Ternium's 6.3 per cent gains.

Mechel recently signed an agreement with South Korea-based Posco for collaborating on a mutually beneficial strategic partnership for promoting the products produced by Mechel's affiliates and Posco.

Analysts polled by Bloomberg expect Mechel's earnings to reach $2.23 a share for 2010 and $4.03 a share for 2011, a remarkable increase from the 18 cents a share reported for 2009. Of the eight analysts covering the stock, six recommend buying it and two recommend selling it.

Teck Resources, a stock cherished by analysts, is an integrated natural resources company engaged in mining, smelting and refining. The company mines copper, zinc, molybdenum, gold, and metallurgical coal in the U.S., Canada, Peru and Chile.

Teck Resources plans to increase copper production by 40 per cent from 2009 to 2013 and triple production over the next decade or so. While long-term projects likely will be expensive and complicated, CEO Don Lindsay said Teck could self-fund the projects and meet other cash commitments even while discounting current commodities prices, according to a JPMorgan report. In addition, exposure to high-growth emerging markets through copper, coal and zinc exports likely will benefit Teck in the long run.

Over the past month, the stock has jumped 14.4 per cent on rising copper and metallurgical coal prices. An increase of $10 per tonne in Teck's realized price will increase the company's earnings per share by 25 cents, according to analysts at Desjardins Securities. Of the 18 analysts covering the stock, 15 recommend buying it, three rate it a hold and one advises selling it.

The stock surged 69 per cent during the past year, in comparison with Freeport-McMoRan Copper & Gold's gain of 38.6 per cent and Southern Copper's increase of 39.3 per cent. During the same period, mining giants Rio Tinto, BHP Billiton and Vale gained 35.4 per cent, 19.4 per cent and 19.9 per cent, respectively.

Cliffs Natural Resources, a stock selling at a deep discount and listed among the top 10 mining stocks with upside, is the largest producer of iron ore pellets in North America.

Going forward, Cliffs will likely benefit from higher iron ore prices and its long-term contracts with major steel producers such as ArcelorMittal. For the 2010 third quarter, Cliffs reported earnings of $2.18 per share, up from 45 cents a share in the year-ago period. Cliffs' earnings are estimated at $6.92 a share for 2010 and $9.24 a share for 2011, a remarkable improvement from the $1.63 a share reported for 2009.

Despite a 60.2 per cent gain, after the recent lows tested on July 6, the stock is trading at an attractive forward price-to-earnings multiple of 7.4. Over the past year, the stock has surged 76 per cent, while peers have returned only 31 per cent. Of the 12 analysts covering the stock, nine have buy ratings and three have hold ratings.

Allegheny Technologies is one of the largest and most diversified specialty metals producers serving major markets such as aerospace, defense, and the chemical process and oil and gas industries. The company has a diversified product mix comprising of titanium and titanium alloys, nickel-based alloys and super alloys, stainless and specialty steels, zirconium, hafnium, and niobium, advanced powder metals, tungsten materials, grain-oriented electrical steel, and forgings and castings.

For the third quarter, the company reported a 52 per cent year-over-year surge in sales to $1.06-billion. Sales during the first nine months were just $45-million below the total sales for full year 2009. "We continue to see 2010 as the transition year to the resumption of strong secular growth in our key global markets," said L. Patrick Hassey, chairman and CEO.

The company's recent acquisition of Ladish likely will boost earnings for 2011 on expanding end-market potential and cost synergies. Analysts polled by Bloomberg estimate earnings of $2.73 a share for 2011, up from 32 cents a share reported for 2009 and an estimated 91 cents a share for 2010.

Over the past year, Allegheny has surged around 54.2 per cent, while its peers have gained only 30.1 per cent. Of the 11 analysts covering the stock, seven have buy recommendations, two have hold recommendations and two have sell recommendations.

Stillwater Mining is engaged in the development, extraction, processing, refining and marketing of platinum group metals (PGMs).

The stock likely will see upside on the growing deficit for PGMs. The company has been investing in new projects such the Graham Creek Project at its East Boulder mine and the Blitz project at its Stillwater mine to leverage the anticipated uptrend in palladium and platinum prices.

Year to date, the stock has zoomed 101 per cent, in comparison with a 73.7 per cent jump in North American Palladium PAL and a 0.5 per cent gain in Platinum Group Metals.

Analysts foresee the company reporting earnings of 61 cents a share for 2010 and $1.78 a share for 2011, a turnaround from a loss of 10 cents a share for 2009. Of the nine analysts covering the stock, eight have buy recommendations on it and one rates it a hold.

Metalico, a stock with potential upside, is a ferrous and nonferrous scrap metal processor and the largest fabricator of lead-based products.

During the third-quarter earnings release, President and CEO Carlos E. Agueero said: "Although our average scrap metal selling prices fell for most categories other than non-ferrous products, our operations produced quarterly and year-to-date EBITDA margins of 10.1 per cent, meeting our internal target of 10 per cent. We remain focused on margin generation and expanding the business while meeting or exceeding performance goals. From a macro perspective, we remain bullish on commodity markets for both base metal and precious metal prices in the fourth quarter and into 2011."

Earnings are estimated to increase to 36 cents a share in 2010 and 46 cents a share in 2011, a turnaround from the loss of 8 cents a share reported for 2009, according to analysts polled by Bloomberg.

Despite a 14.8 per cent gain over the past month, the stock is trading at an attractive forward price-to-earnings ratio of 10.5. Of the four analysts covering the stock, three rate it a buy and one rates it a sell.

Report an error Licensing Options
Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.