Jonathan L. Brandt, Senior Equity Research Analyst, Metals & Mining, HSBC Securities
These are mining stock picks from Jonathan L. Brandt, CFA, is a Senior Equity Research Analyst covering GEMs ex-Asia Metals & Mining and LatAm Pulp & Paper at HSBC Securities (USA) Inc.
In the previous six years, he was a buy-side analyst at a major U.S. investment firm covering metals and mining companies in Latin America, Europe, the Middle East and Africa. He holds a bachelor’s degree in economics from Wesleyan University.
In this 3,157 word interview from December of 2020, Mr. Brandt highlighted his top mining stock picks, many of which have had stellar returns since then.
“I would say that in iron ore, the concern has really been over the supply from Brazil and, in particular, Vale (NYSE:VALE). You will remember almost two years ago, in January of 2019, they had the Brumadinho incident.
Production has really been hampered since then. In 2018, they did about 385 million tons of production; that has been hovering around 300 million tons. So we lost a significant amount of capacity from them over the past couple of years, and that combined with strong demand has led to iron ore prices staying north of $100 for a while, and now we’re sitting at about $120.
Vale is desperately trying to get that production back.
We think they will, but it’s a matter of time. Their capacity is about 400 million tons. What they’ve said is they should reach that run rate sometime in 2022. We would expect them to be back up to full-year production — about 385 million tons, which is what they did in 2018. We would expect them to be back up there by 2022 or 2023. We are seeing better supply coming from Vale.
Because iron ore prices have been strong, we’ve also seen incremental supply coming from other producers. Anybody that is producing iron ore is looking to produce as much as they can because prices are really, really strong.
And we’ve seen that not only out of domestic China, we’ve seen some incremental production also in other parts of Brazil. We’ve seen Australia be really, really strong. They set some records this year in terms of monthly production. But it’s really Vale that will need to bring back supply in order to try and balance the market.
…Within metals and mining, Vale is our top pick. We like the cash flow generation. We think the company is doing a lot of positive things on the ESG side.
The “controlling shareholders” and that agreement has expired today, so there are no more controlling shareholders. There’s less government influence. It’s becoming what they envisioned a couple of years ago — a “true” corporation.
It’s taken a few years to get there, and it’s still not 100% there yet, but it’s certainly on the right path.
The next big milestone for them will be their board of directors election in April of next year. Certainly, we’d expect more minority shareholder participation and influence on that election. So we think there are a lot of positive things, even if we expect the iron ore price to weaken a bit.”
There are other mining stocks detailed in this interview:
The other ones [mining stock picks] we’ve been recommending have been Gerdau (NYSE:GGB), Ternium (NYSE:TX) and Grupo Mexico. I think of those, the ones that look more attractive are Ternium and Grupo Mexico.
Gerdau is still a fantastic story, it’s just starting to look a bit expensive, but it’s a nice play on potential Brazilian infrastructure. We’ve seen their economy has really improved since April and May, when they were really impacted by the pandemic.
We have historically low interest rates in Brazil — I think they are at the lowest they have ever been — and that has spurred all sorts of demand for real estate.
We’ve seen significant real estate launches and construction starting, and that has obvious implications for long steel rebar and things like that. We think that demand for long steel continues until 2021 at least.
What we’re seeing from China in terms of their steel demand, that’s had an impact on pricing, and that pricing that we’ve seen in China has influenced prices positively in Brazil.
So there are price hikes; there are volume growth and good demand. We think Gerdau is a good way to play that, and if the U.S. government can put through an infrastructure stimulus program, Gerdau is the natural beneficiary of that, given their operations in North America.
Grupo Mexico is positively exposed to the copper price; 80% of their NAV is going to be copper through their subsidiary, Southern Copper. They are one of the lowest-cost producers; they’re well into the first quartile of cash costs.
Their C1 cash costs are $0.65, $0.70 per pound. You compare that to the $3.20 per pound that we have today for a price, and cash flow is really, really good.
They’re one of the few producers who can push through production growth in the next several years. It’s not a lot in the next several years, but it’s something. And then there’s more meaningful greenfield expansion coming probably later in the decade — six, seven years from now — and that has the ability to move production from 950,000 tons to 1 million tons today, closer to 1.5 million tons, 1.6 million tons.
You’re talking 50% growth over, conservatively, let’s call it 10 years, at the low end of the cost curve. To us, it’s attractive.
At the same time, you’re getting a 5%, 6% dividend. It’s not as good as some of the majors, it’s not as good as what we expect Vale and some of the London listed majors are paying, but you also don’t necessarily have the same type of growth with them.
And it’s trading at a pretty significant discount to Southern Copper. I think last we checked, it was like a 40%-plus sum-of-the-parts discount to Southern Copper and their railroad subsidiary, Grupo Mexico Transportes. We think you’re getting good growth, good exposure to the markets that we like. Presumably, their rail division is positively exposed to normalizing trade relations between the U.S. and Mexico.
So all in all, we continue to really like it, despite the good performance that it’s had.
The last one is Ternium. We’ve seen Mexico demand improve from the pandemic levels. We’ve seen prices increase.
They had a very good quarter; we’d expect that to carry over into the fourth quarter and into 2021, both from a volume standpoint and also from higher steel prices. In our view, they’re one of the best-managed steel companies, I would say not only in Latin America, but I would put them up against any steel company globally.
I think management is top notch, and we can see that through their returns, which have consistently been above cost of capital, regardless of the steel price environment. They manage their operations very, very efficiently. We continue to like that one as well.”
Mining stock picks have been a top performing sector, read the entire 3,157 word interview from December of 2020 with Jonathan Brandt to get all his mining stock picks.
Jonathan L. Brandt, CFA
Senior Equity Research Analyst
HSBC Securities (USA) Inc.
email: jonathan.l.brandt@us.hsbc.com
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