All Is Not Well But It May Be Time To Dig Deep In Mining Sector

While the U.S. markets remain undaunted by the ongoing crisis in Cyprus. The equity market is a stark contrast of sorts compared to the mining sector which has remained a laggard and has only gone down while the rest of the market has seen better valuations.

Over the last six months, the Dow Jones U.S. Mining Index (INDEXDJX:DJUSMG) has lost 21 percent while benchmark index Dow Jones Industrial Average (INDEXDJX:DJI) gained 6.8 percent. Returns of other benchmark indices have also been in comparable range. This underperformance has largely been due to concerns of global economy hitting a slowdown.

Mining companies globally have reacted to falling ore prices by rolling back their capital spending plans. As a result, companies such as Thompson Creek Metals Company Inc (NYSE:TC) (TSE:TCM), Cliffs Natural Resources (NYSE:CLF), and Molycorp Inc (NYSE:MCP) have been at the receiving end.

All Is Not Well But It May Be Time To Dig Deep In Mining Sector

US economy’s dichotomy present opportunities

Given the situation in Europe and China, these concerns are not unfounded but at the same time, material and big differences between a surging U.S. economy and rest of the world present a scenario which requires further prodding. In line with global trends, valuations are largely depressed in this area even for companies primarily operating in the U.S. Since the country is enjoying a charging economy, it is no-brainer that the space could be full of opportunities.

One such company is Colorado based diversified player Thompson Creek Metals Company Inc (NYSE:TC) (TSE:TCM). Thompson Creek is primarily engaged in mining of molybdenum, copper and gold with majority of operations in North America.

For all practical purpose, the company can be considered a U.S. producer of molybdenum. During 2012, the company generated nearly 80 percent of its revenues from its U.S. molybdenum operations. Unlike gold which has limited to industrial applications, molybdenum is a metal used in a variety of industrial applications.

Thompson Creek is not a profitable company but a look at its operational performance reveals that the net effect of a lower average sales price more than offset the benefits from operational improvements. Lower prices have caused molybdenum inventory to soar at the company. Now the inventory that has been built up is a harmful practice but so is selling it at throw away prices. This oversold stock currently trades below its book value of $8.3.

Similarly, Cliffs Natural Resources (NYSE:CLF) derives nearly 48 percent of its revenues from the U.S. and Canada while a large chunk is contributed by China. The company is engaged in extraction of iron ore and coal.

For structural reasons, short to medium term outlook of these commodities is bleak. This is no wonder then that the stock is regularly creating fresh 52-week lows. At a price of around $20 a share, it is already trading below the book value of $32.5 and as such, the downside may be limited. In this sense, it may be attractive for dividend hunters with an annual yield of 2.9 percent.

Rare does not mean hot now

Rare earth poster boy Molycorp Inc (NYSE:MCP) has seen worst of the times lately with more than 55 percent value erosion in the last six months. Its financial performance has also been volatile lately, reflecting weak prices for rare earth metals. As the initial euphoria surrounding electric cars has died its natural death, prices of these rare earth metals have come down substantially and there are no triggers for a spike anytime soon.

China, which controls over 90 percent of the global supply of these metals, is itself sustaining a drop in industrial activity leading to greater availability for exports. While a substantial increase in the rare earth metal prices in the short term is not likely, the market is poised to recover in the long term due to steadily increasing demand of rare earth metals in a number of applications and products.

Overall, the opportunity in U.S. mining space is a significant one. It may be difficult to put a timeline on the recovery but as they say, early bird gets the worm. Keeping an eye on quarterly financial performance would help investors in identifying start of a buying spree in these stocks.