5 Emerging Market Mining Stocks With Upside

NEW YORK (TheStreet) -- The recovery in the global economy, backed by liberal doses of fiscal support announced by various governments, has sustained buying interest in metal and mining companies. We have identified five emerging market mining stocks that can deliver returns in the range of 10% to 30% during 2011: Sterlite Industries (SLT), Vale (VALE), Gerdau (GGB), Companhia Siderurgica Nacional (SID), and Puda Coal (SLT).

In contrast, mining majors BHP Billiton ( BHP) and Rio Tinto ( RIO) have upsides of 8%-10%, according to consensus estimates of 12-month target prices compiled by Bloomberg.

A demand surge for commodities worldwide ensured upswings in most metal prices. Gold and silver had a good run, delivering 25% and 70% returns during the past one year, respectively. Among other metals, copper and nickel churned more than 30% each during the same period.

Analysts are positive on metal prices in the short- to medium-term as the liquidity crunch has eased, primarily due to the quantitative easing measures rolled out by several central banks. Besides, a revival in developed economies like U.S. and a sustained push from emerging markets would augur well for mining companies. Overall, metal and mining companies from emerging markets are expected to do well on increased domestic demand.

These stocks are stacked in terms of upside.

5. India's Sterlite Industries ( SLT) is a non-ferrous metals and mining company.

On the operational front, production ramp up at its new smelters will enhance operations, while improved water availability and ore quality are other positives. Additionally, the company's earnings could get a boost from strong performance from its power and zinc segments.

Power sales are expected to increase with large capacities coming on-stream. The company would be selling merchant power from its Bharat Aluminum (BALCO) division, expected to start operations later this year.

With the commercialization of large capacities, raw material costs could be a concern, according to analysts. Sterlite recently underperformed broader market indices, hampered by regulatory restrictions at its Tuticorin and Orissa projects.

However, any advancement in the arbitration proceedings for its proposed acquisition of the government's minority stakes in BALCO and Hindustan Zinc would be positive. The stock is trading at 8 times its 2011-12 earnings.

4. Brazil's Vale ( VALE) engages in the production of iron ore, manganese ore, and ferroalloys.

For the 2010 September quarter, the company reported better-than-expected results. Revenues grew 110% year-on-year, net profit was up 260%, and EBITDA margins zoomed 39%, attributable to strong iron prices during the quarter. Besides, the rebound in China's demand during the third quarter buoyed volumes. Top-line got a boost following the ramp up in Canadian operations. Operationally, several cost control measures boosted margins.

In a recent report, Rodolfo R. De Angele, analyst at JPMorgan said," We remain Overweight on Vale as it is highly leveraged to our constructive view on the medium-term outlook on iron ore." The stock is trading at 4.8-5 times its estimated 2011 earnings before interest tax depreciation and amortization (EBITDA), at a discount to its peers.

3. Brazil's Gerdau ( GGB) is an integrated steel player operating in 14 countries, mainly Brazil, North America, and Latin America.

The company acquired Gerdau Ameristeel in August 2010. To consolidate its plans further, Gerdau recently announced the acquisition of Acos Villares, a company engaged in the production of long steel. Besides consolidation, the company has investment plans worth $6 billion scheduled for the next five years.

The stock is trading at 7-7.2 times its estimated 2011 enterprise value per EBITDA, compared to the peer average of 6-6.2 times. Consensus estimates suggest earnings to scale up by around 30-35% during 2011, riding on the back of improving fundamentals. The stock is trading at 7.5-8 times its estimated 2011 earnings.

2. Brazil's Companhia Siderurgica Nacional ( SID) is an integrated steel producer with interests in mining and logistics.

EBITDA margin improved to 43.1% during the first nine months of 2010, compared to 30% in the year-ago period, backed by the company's efficient cost-containment strategy. However, analysts believe that higher capital expenditure related to investments in a railroad and securities trading could damp margins as well as earnings, going ahead.

During the first nine months of 2010, net sales were up 38%, fueled by higher domestic sales. As a percentage of revenue, domestic sales jumped 73% during the third quarter, compared to 71% during the same period last year. However, the share of exports in overall revenues has dipped due to uncertainty prevailing in the global markets.

The stock is trading at 5 times its estimated 2011 earnings value per EBITDA, at a discount compared to its peers.

1. Puda Coal ( PUDA) is located in China's Shanxi province. The company caters to high-quality metallurgical coking coal market and has relationships with 17 coal mines.

During the third quarter, Puda reported a 60% year-on-year increase in total revenues and 86% in net income for the quarter, higher than consensus estimates. Gross margin stood at 10.7%, improving 110 basis points from the third quarter of last year.

The Shanxi provincial government has appointed Puda as a consolidator of 12 coal mines. The purchase price offered is twice its EBITDA, with a potential EBITDA margins of 50% and net income margins of 40%. Going ahead, these mines could lead to higher margin coal mining operations.

The company has good future prospects, considering that the burgeoning electricity demand in China would require massive volumes of coal. As per Energy Information Administration estimates, another 600 gigawatt of additional demand for electricity would be required by 2030, which indicates the demand upsurge for coal. The stock is trading at 7.5 to 8 times its 2011 earnings with 100% buy ratings.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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