Which Metals & Mining Stock Look Best For 2009? (RTP, BHP, ABX, GG, BTU, MEE)

In our preview of energy stocks for 2009 we were able to come up with a company that might actually provide a decent return to investors. Looking at some of the major mining stocks, however, is a somewhat bleaker experience.  We have reviewed Rio Tinto plc (NYSE:RTP), BHP Billiton Ltd. (NYSE:BHP), Barrick Gold Corp. (NYSE:ABX), Goldcorp Inc. (NYSE:GG), Peabody Energy Corp. (NYSE:BTU), Massey Energy Co. (NYSE:MEE) to see which of the major miners have the best and worst prospects for 2009.

Just look at the drops from 52-week highs:
                                                                 Percent below high
                                          52-week Range    (on 12/11/08)
Rio Tinto (NYSE:RTP)           $59.20-558.65           83%
BHP Billiton (NYSE:BHP)       24.53-95.61             74
Barrick (NYSE:ABX)               17.27-54.74             68
Goldcorp (NYSE:GG)              13.84-52.65            74
Peabody (NYSE:BTU)             16.00-88.69            82
Massey (NYSE:MEE)             10.05-95.70            91

That’s pretty ugly. And revenue estimates going into 2009 don’t offer anything to look forward to either:

        Full year 2008 (est)    Full year 2009 (est)
Rio Tinto    $37.10 billion        $30.72 billion
BHP           62.75                   62.50
Barrick        7.87                     7.50
Goldcorp     2.41                     2.68
Peabody     6.33                     7.53
Massey      3.02                     3.60

And, except for the coal companies, EPS projections are also headed in the wrong direction:

        EPS thru Dec 08  EPS thru Dec 09
Rio Tinto    $34.60            $24.89
BHP             5.43              5.00
Barrick         1.96              1.66
Goldcorp       0.62              0.64
Peabody       3.21              4.88
Massey        3.43              4.52

The EPS gains in coal evaporate when we look at dividend yields:

        Trailing Annual   Forward Annual
        Dividend Yield     Dividend Yield
Rio Tinto    6.4%             7.4%
BHP          3.4                4.3
Barrick      1.3                1.4
Goldcorp    0.7                0.7
Peabody    0.9                1.1
Massey     1.3                1.8

On the face of it, the global mining giants Rio Tinto and BHP Billitonlook to be the best bet for dividend yields, but EPS estimates are downnearly 30% for Rio Tinto. EPS estimates for BHP indicate that it willbe down about 8% in 2009 on only slightly lower revenue. The bad news is that Rio Tinto is struggling with $37 billion in debt, andlower demand for virtually all its products, including iron ore whichcarried the company through the second and third quarters of 2008. Thestory at BHP is about the same in terms of demand, but it carries onlyabout $9.2 billion in long-term debt. It’s hard to see how Rio Tintodoesn’t shrink in 2009, or how BHP does much better than stay even with2008.  Cramer’s recent "shotgun marriage merger proposals" in mining and metals are seeming fartherand farther away from reality right now.

The gold stocks, Barrick and Goldcorp, appear to be no better thansteady with 2008 results. This is a little strange because the demandfor gold bullion currently outstrips supply. At Barrick, cost ofrevenues grew nearly 50% from the second quarter to the third quarter.Goldcorp managed its costs better, but revenue fell quarter overquarter by about 15%. Gold will is likely to inversely track oil: oilgoes up, gold goes down. And vice versa, but only to a point. The 2009estimates for gold stocks is pretty flat to 2008, and that appears tobe justified.

Coal looks good for 2009. EPS estimates for both companies are up,Peabody about 34% and Massey about 24%. But northern Appalachian coalis down about 30% since the beginning of October, and centralAppalachian coal is down about 33% in the same period. Because coal isused primarily to generate electricity and to make steel, it too istracking the economic slowdown. Less electricity demand from industryand lower demand for metallurgical coal are keeping prices down now.

The short version of all this: coal looks like the best house in a badneighborhood. That’s usually not the best place to buy.  Gold gets tocompete against the failing laws of the flight to quality versuspossible deflation, and those old diversified giants may actually haveto just go at it alone from here on out rather than go for some of themonopoly-making mergers.

Paul Ausick
December 11, 2008