Philip Gibbs, a Vice President, Equity Research Analyst with KeyBanc Capital Markets, says the oil & gas sector accounts for about 10% of direct steel consumption in the United States, and perhaps a bit more if energy-related infrastructure is included. He says United States Steel Corporation (X) is among the companies with the most significant exposure to oil & gas drilling companies.
“Historically, US Steel has generated 30% to 40% of their EBITDA generation from that market,” Gibbs says. “And they’ve concurrently announced layoffs along with many other participants in the market.”
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Gibbs says the energy market has also suffered as a result of a high level of imports, which have continued through the first quarter of 2015. However, he expects to see some positive developments later this year.
“So energy markets have been hit by the macro downturn/spending, and they’ve also been hit by imports,” Gibbs says. “We believe both of these trends should stabilize some time later this year and in 2016 as we get a better picture on what production is going to be moving forward.”
David Talbot, Vice President and Senior Mining Analyst at Dundee Capital Markets, has a “buy” rating on industry leader Cameco Corporation (USA) (CCJ). He says the company is poised to benefit in a strong price environment, and is often a first choice among investors.
“They recently reported record annual revenue with 30% higher realized prices than spot,” Talbot says. “Operations are working exceptionally well.”
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However, Talbot says Cameco’s management does have a fairly bleak near-term outlook for uranium, and they are deferring capital projects and future production. In addition, the U.S. IRS has initiated a pricing transfer investigation of Cameco, and the company has an outstanding tax liability issue with a Canadian revenue agency.
“So there are [a] couple of things that might cast the shadow over the stock over the next couple of years,” Talbot says.
Haywood Securities Analyst Stefan Ioannou that Talon Metals Corp. (TLO) is one of three very good high-grade nickel explorers. Through Talon’s JV with Rio Tinto plc (RIO), the company has a project in Minnesota called Tamarack, where they are drilling a high-grade deposit.
“It is shaped like a tadpole, and all the drilling right now is focused on the high-grade tail,” Ioannou says. “But there is the large head of the tadpole that hasn’t been tested yet. I think that’s why Rio Tinto is interested in it.”
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Even if the head doesn’t work out, Ioannou says the tail on its own has already demonstrated grade and size potential that’s significant enough to attract a small- to mid-tier producer.
“If the head of the tadpole works out, we are talking about something like a Voisey’s Bay-type target,” Ioannou says.
Haywood Securities Analyst Stefan Ioannou says he has a favorable view of Hudbay Minerals Inc Ord Shs (HBM) because the company has an impressive growth profile going forward. He says Hudbay’s mainstay is in the Flin Flon region of Manitoba, which is a historic, world-class mining camp.
“They’ve got three mines currently in production there, namely 777, Lalor and Reed,” Ioannou says. “Lalor is relatively new and stands to replace 777 as the camp’s flagship deposit with notable exploration upside potential.”
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Ioannou says Hudbay also has a lot of zinc production in its profile, and is working to establish commercial production at Constancia, which is a large copper project in Peru. And, he says Hudbay’s longer-term growth profile includes a copper project in Arizona that resulted from its takeover of Augusta last year.
“Focus is centered on permitting, which remains underpinned by a vague timeline noting the project has a history of environmental opposition. So we will have to wait and see on that one,” Ioannou says. “But the company’s production growth profile looks very impressive over time, if they can execute in Manitoba, get Constancia up and running well this year, and then work toward a more definitive timeline for Rosemont down the road.”
Jorge M. Beristain, Managing Director at Deutsche Bank Securities Inc., says he thinks Alcoa Inc’s (AA) acquisition of RTI International Metals makes perfect sense. He says it complements Alcoa’s existing titanium business and helps them integrate back into raw material.
“Companies are trying to move themselves away from China in the sense that you don’t want to be competing head to head even in processed commodity supply right now,” Beristain says. “However, if you’re able to move a bit further downstream perhaps into titanium, which is much more of a technologically driven metal, then you are able to maintain margins and still hold the line on pricing and get away from head-to-head competition with China.”
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Beristain says he expects to see synergies between the companies’ foundry and casting operations.
“And it just generally continues to diversify Alcoa a bit further downstream and gets them just that one step closer to the end-aerospace clients,” he says.
Stillwater Mining Company (SWC) CEO Mike McMullen says the company has reduced its SG&A spend by about 35%. He says the cuts have been achieved through various reductions and productivity enhancements over the last six months.
“We cut headcount within the company as a whole from when I started to today by over 160 people, and that was achieved through a combination of reorganizations in the salaried ranks and voluntary severances in the hourly work force — where we offered people a package if they wanted to leave — and through natural attrition,” McMullen says. “So we haven’t replaced all of the people that have left.”
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Many of the cuts have been focused on the company’s Stillwater Mine. McMullen says 110 positions have been taken out of the workforce there.
“It’s a very large operation. Focus in the past had always been on production ounces but not necessarily profitable ounces, and so we’ve really changed the focus of the business to be back on profitable ounces,” McMullen says. “And we have also been investing in infrastructure and technology there, especially to enhance productivity.”
Managing Director Stephen M. Goddard of The London Company of Virginia says Dollar Tree, Inc. (DLTR) is a position in his firm’s madcap strategy that has appreciated meaningfully, and is one reason behind the firm’s high exposure to the consumer discretionary space.
“Dollar Tree, our largest holding, has done very well and is currently about 6% of the strategy. We have confidence in the management team meeting many of the metrics we are seeking: high returns of capital, shareholder-oriented capital allocation and a reasonable valuation,” Goddard said.
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While normally wary of acquisitions, Goddard says Dollar Tree has been disciplined in its deal for Family Dollar, which will more than double its store base.
“We believe they have a large opportunity to accrete significant value through margin enhancement and synergies,” Goddard added.
Last Friday, April 3, the U.S. Government released its job growth and employment numbers for March, and to most analysts’ surprise, the totals were quite weak and well below most analysts’ expectations. Liberum Research, which tracks executive turnover in public companies saw the situation a bit differently. Liberum’s North American executive turnover numbers were much better than the U.S. government job growth and and unemployment numbers for March. While Liberum’s March figures were far from terrific, they continued to point in a positive direction for the North American economy particularly the United States economy. Many experts are now atttributing the government’s weak March numbers to the continuing harsh winter. On Monday April 6, the Los Angeles Times quoted the President of the New York Fed, William C. Dudley when referring to the job numbers as folllows,
“The March labor market report is another indicator that the first quarter is likely to be quite weak,” Dudley said in the first comments from a Fed policymaker on the employment data released Friday.
Dudley said the report showed a broad-based slowdown in job creation last month. He added that “it will be important to monitor developments to determine whether the softness in the March labor market report …. foreshadows a more substantial slowing in the labor market than I currently anticipate.” The recent “downside surprises” in key economic data reflect “temporary factors to a significant degree.”
His staff found that the effects of snow and winter weather in the Northeast and Midwest were 20% to 25% more severe than the five-year average.
Time will tell but Liberum Research contends Dudley’s assessment is correct. Over the last number of months, Liberum Research has seen a slowdown in executive turnover but as of this point, the slowdown has not been worrisome. Liberum expects the spring and summer months will show far more improvement in executive turnover totals, and if that happens it will bode well for the North American economy.
Liberum has put together below, a seven plus year quarterly breakdown of executive turnover totals for CEOs, CFOs and C-level executives covering North America. Most of the below quarterly numbers showed continuing declines until the second quarter of 2011. At that point, the numbers began to reverse themselves. Turnover at the executive levels of corporate America began to grow, while not consistently, and that trend has continued and Liberum expects it to be about the same for the remainder of 2015.
Anyone investing in the market must pay special attention to executive turnover both at the top and the middle executive ranks. Failure to do so, will result in lost opportunities or worse. To take advantage of executive changes, get a free trial to Liberum’s Online Management Change Database. Just call Richard at 212-988-5497 or send an email to richard@twst.com requesting your free trial. Within a day of your trial, you will have access to over 200,000 data points from which you can generate ideas and daily information on who is changing jobs at the top and where they are going.
Quarterly and Annual Executive Turnover Totals
Below is a simple table outlining the quarterly and annual turnover totals as registered through Liberum Research’s Management Change Database for 2008 through the first quarter of 2015 for CEOs, CFOs, and overall C-level turnover.
Total CEO Turnover Comparisons
| Year | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 |
| 1st Quarter | 745 | 491 | 388 | 346 | 680 | 583 | 500 | 522 |
| 2nd Quarter | 596 | 380 | 321 | 581 | 665 | 619 | 527 | |
| 3rd Quarter | 533 | 409 | 298 | 713 | 636 | 627 | 557 | |
| 4th Quarter | 461 | 430 | 328 | 697 | 673 | 636 | 651 | |
| Annual Total | 2,335 | 1,710 | 1,335 | 2,337 | 2,654 | 2,465 | 2,235 | 522 |
TJ Schultz, Analyst with RBC Capital Markets, says Enterprise Products Partners L.P. (EPD), a bellwether for the MLP sector, is one of his favorite defensive names in the space. Unlike less defensive peers, Schultz says Enterprise is continuing rather unaffected from a growth perspective as producer customers slow their drilling plans.
“EPD has no general partner, it has high distribution coverage, it is investment-grade, and the growth profile really hasn’t budged in our view,” Schultz says. “So you’ve seen a pretty distinctive split between those MLPs that we view as defensive and those that have a little bit more exposure to some of the changes in producer activity.”
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Meanwhile, other MLPs are working to gather as much information as possible from producer customers. Schultz says the market is just now starting to get a sense from midstream companies on what the next stage of growth will look like in the current commodity price environment.
“It’s kind of company-specific within the MLP space, and those that have more commodity exposure or more volume sensitivity have, as I said, chosen to be more prudent on growth and react to what their producer customers are saying,” Schultz says.
RBC Capital Markets Analyst TJ Schultz says he thinks drop-down stories have highly visible growth that warrants premium valuations despite crude volatility. He says Dominion Midstream Partners LP (DM) is one of his favorite drop-down stories, and a stock for which he’s willing to pay up for the visible growth.
“Dominion Midstream has some of the most explicit and clear distribution growth guidance in the entire MLP space,” Schultz says.
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At its analyst day in February, Dominion Midstream’s management unveiled plans to support a 22% distribution compound annual growth rate through 2020.
“With that, we think the high growth through 2020 will continue to warrant a premium valuation on Dominion Midstream, and it should make it a name that performs well this year if uncertainty persists elsewhere,” Schultz says.
