Materials - TECK!!! + NTR!!!
Let’s use the last two weeks of the year to run through the 11 market sectors.
Let’s start with the addition of Teck Resources - TECK - $43.
I really wanted to add Rio Tinto - RIO - $61 - to the Model 25 portfolio. It is a classic value stock. RIO is 35% lower than its 5-year high, sells at 5x 2021 earnings, and has a 7% yield. But before I could add RIO I had to a least consider the other materials stocks. When I started to study TECK, here is what I liked:
I have heard the copper bull story, but never really focused on its implications. I knew I did not trust the politics of Indonesia (the location of big copper miner, Freeport McMoran’s largest mine). After more review, I am a now a copper believer. We have not built enough mines over the last 20 years, and now the world needs more copper. Some of that is China, but even without China growth, we still need more copper.
TECK has joined the shareholder centric revolution. Many mining companies are just “deep hole diggers” that gleefully issue more shares to fund the next mine. TECK has embraced the shareholder religion much more than RIO, Glencore, or BHP.
TECK has net cash on the balance sheet following the sale of its coal assets. Finding a mining company with no debt is unusual.
I think I understand the politics of Chile. I worked with an analyst that did his Mormon mission in Chile, so I have always followed their politics. New leader Boric is a self proclaimed libertarian-socialist. He seems to have made peace with the mining companies, but there are risks.
The dominant zinc business (20-30% of EBITDA) provides cash flow for copper development projects.
Glencore (the Swiss mega-miner) badly wants to buy more copper, and TECK is just the right size. If TECK has problems, Glencore will swoop in and buy it. If TECK succeeds the stock can go to $70. In today’s market, that is a good risk/reward.
Nutrien - NTR - $47 - (potash, phosphate, and nitrogen, plus a great retail network) is my other favorite materials stock. NTR had a great investor day presentation this June. If you have sleep issues, please dive in. Someday the ag cycle will turn. People still need to eat. Collect 5% while you wait. NTR has bought back 25% of its shares. Return on capital has been 12% through the cycle. Debt is under 3x average EBITDA. Marginal Russian potash mines, and low North American natural gas prices, help the long-term story.
The small/mid cap value indices are 6% materials, so we are slightly over-weighted at 8%. Maybe we should own more?
Here are the other materials stocks I considered:
Hudbay Minerals - HBM - $9 - There is plenty to like here in this small-cap copper miner. If I had 3 months to compare HBM and TECK, I might choose HBM. The company has more leverage to copper prices than TECK. Very low-cost mines. I have some fear of Peruvian politics.
Mosaic - MOS - $26 - I prefer NTR, but reasonable folks could disagree
FMC - FMC - $52 - some Bobby Kennedy risk in pesticides, prefer NTR and or CTVA
Dow - DOW - $40 - I wrote about this stock last week.
Stepan - SCL - $73 - This is my favorite of 20 smaller cap chemical companies I looked at. On a slow day I will look harder at their new eco-friendly insulation products.
Eastman Chemical - EMN - $96 - Cool story except for their exposure to cigarette filters
Rio Tinto - RIO - $61 - 75% iron ore for China, great new project in Guinea.
Freeport-McMoran - FCX - $41 - a shaky pit wall in a country with too many rebels
Tronox - TROX - $10 - if housing bounces back, there is upside in titanium dioxide
Ball - BALL - $58 - beer cans are boring, but boring can be beautiful
Nucor - NUE - $122 - too much Trump hype, but they are great operators
Huntsman - HUN - $19 - a mini-Dow
Celanese - CE - $68 - should be a case study in too much debt
Martin Marietta - MLM - $542 - everybody should love a great cement stock, at some price
OI Glass - OI - $11 - needs more work, but maybe
Kaiser Aluminum - KALU - interesting, but too tied to Boeing
Trimas - TRS - $26 - very sleepy, but well run
Albemarle - ALB - $100 - the big guys are coming in lithium
PPG - PPG - $122 - again, too much housing
Air Products - APD - $305 - maybe the hydrogen winners, but it is a long road
Clearwater Paper - CLW - $26 - needs more work
Amcor - AMCR - $10 - well run, but shareholders come last