7 Mining Stocks to Watch

NEW YORK (TheStreet) -- The world's top 40 miners achieved combined net profit of $110 billion in 2010, according to a PricewaterhouseCoopers Mine 2011 report. These miners have managed to slash their debt by half and have built cash reserves of $105 billion. Moreover, they have announced capital expenditure of $300 billion for 2011.

In the first half of 2011, 1,379 mining M&A deals worth $71 billion were announced globally, according to a PwC report. On average, the deal value stood at $104 million, 40% higher than the year-ago period. With volatile global markets putting downward pressures on mining valuations for remaining part of 2011, deal activity is foreseen to slowdown. Despite the expected slowdown in deals during the second half of 2011, demand for metals from China and other emerging nations will drive the sector's long-term fundamentals. Also, factors like an average mining company recording all-time low debt levels and high cash flow and profitability levels would support industry growth.

Based on latest quarterly results and strong analysts' buy, hold recommendations for attractive future returns, these seven mining stocks have potential upsides ranging from 18% to 54%. The average buy recommendation for these stocks is 63%, while average hold rating is 33%, based on a Bloomberg consensus.

The stocks are arranged in ascending order of potential upside.

7. Ivanhoe Mines ( IVN) is an international mineral exploration and development company operating through two subsidiaries. The company has interests in coal resource properties in Mongolia and molybdenum, rhenium, copper, gold and uranium resource properties in Australia. Its principal mineral resource property is the Oyu Tolgoi Project, located in Mongolia.

The company announced said that construction at Oyu Tolgoi is advancing on schedule and on budget, and reached 30.8% level of completion at the end of the second quarter of 2011. Contract negotiations for the supply and sale of copper-gold-silver concentrate produced at Oyu are expected to be finalized in fourth quarter of 2011, with most of the concentrate expected to be delivered to smelters in China. Ivanhoe swung to net income of $0.6 million for the second quarter 2011 compared to net loss of $30 million in year-ago quarter. Revenue more than doubled to $47.3 million year-over-year.

Ivanhoe recently confirmed that Rio Tinto has exercised its subscription right to acquire an additional 27.9 million common shares of the company for total proceeds of $536 million. This raises Rio's stake in Ivanhoe to 48.5% with a total investment of more than $4 billion since October 2006. As of August 24, 2011, the company's consolidated cash balance stands at $1.7 billion.

Ivanhoe recently said that gold and silver sales would generate almost 50% of total annual revenue at Oyu Tolgoi during early mining from the gold-rich open-pit mine currently under construction, despite copper being the most important metal at the mine. Revenues from gold and silver will likely lower the average cash cost to produce a pound of copper during the first five years of mining at Oyu Tolgoi.

Of the 9 analysts covering the stock, 33% recommend a buy and 44% rate a hold. Data from Bloomberg has analysts forecasting the stock gaining 18.1% to $26.00 in the upcoming 12 months.

6. Agnico-Eagle Mines ( AEM) is a Canada-based international gold producer with mining operations in northwestern Quebec, northern Mexico, northern Finland and Nunavut, and exploration activities in Canada, Europe, Latin America and the U.S., where it has six operating 100%-owned mines.

Second quarter 2011 revenue was recorded at $434.9 million, vs. $353.9 million in the year-ago quarter. Net income for the quarter stood at $68.8 million, or 41 cents per share. During the quarter, the company recorded strong operating cash flow of $162.8 million, or 96 cents per share. Also, cash and cash equivalents increased to $139.0 million at the end of Jun. 2011, higher than the prior quarter's $114.8 million. Total cash costs for the quarter reduced to $565 per ounce from $482 per ounce in year-ago quarter.

At the end of second quarter 2011, payable production at the Pinos Altos mine stood at 51,066 ounces of gold at total cash cost per ounce of $299, as compared to 29,665 ounces at a total cash cost of $365 in the same quarter prior year. On consolidated basis, total payable production for gold was 239.3 million ounces, silver 1.2 million ounces, zinc 14.7 million ounces and copper 666,000 ounces.

At the end of August, the company went ex-dividend with shareholders being eligible for a dividend of 16 cents per share. AEM has a dividend yield of 1%.

Of the 20 analysts covering the stock, 60% recommend a buy and the rest rate a hold. The stock has no sell ratings. Data from Bloomberg has analysts forecasting the stock gaining 19.6% to $85.19 over the next 12 months.

5. Newmont Mining ( NEM), a gold producer, also engages in the production of copper, principally through its Batu Hijau operation in Indonesia and Boddington operation in Australia. Its operating segments include North America, South America, Asia Pacific and Africa.

For the second quarter of 2011, the company recorded net income from continuing operations of $523 million, or $1.06 per share, an increase of 37% from the year-ago quarter. Net income attributable to company shareholders stood at $387 million, or 77 cents per share. Revenue for the quarter rose 11% to $2.4 billion from the same quarter last year. During the period, the average realized prices of gold and copper increased 25% and 62%, respectively.

Cash dividends for the quarter rose to 20 cents from 10 cents in the earlier quarter. Looking ahead for 2011, the company forecasts capital expenditure to range from $2.7 billion to $3.0 billion on a consolidated basis. Attributable gold production is estimated at 5.1 million to 5.3 million ounces, while attributable copper production is pegged at 190 million to 220 million pounds.

Recently, Stellar Pacific Ventures entered into a joint venture agreement with Newmont Ventures, subsidiary of NEM, to jointly participate in the exploration of the Namarana Property in Mali and to acquire additional properties within the area. Besides, NEM said it is seeking a new underground exploration program at its Waihi site in New Zealand, which could extend gold and silver mining to 2020 and beyond.

Of the 19 analysts covering the stock, 63% recommend a buy and the rest rate a hold. There are no sell ratings on the stock. A Bloomberg poll expects the stock to gain an average 21.9% to $77.77 over the next 12 months.

4. BHP Billiton ( BHP), a diversified natural resources company, operates in nine customer sector groups: petroleum, aluminium, base metals (including uranium), diamonds and specialty products, stainless steel materials, iron ore, manganese, metallurgical coal and energy coal.

For fiscal year ended Jun. 30, 2011, the company recorded revenue of $71.7 billion, an increase of 35.9% from the previous year. Profit attributable to the group escalated 85.9% to $23.6 billion for the same period. Net operating cash flow surged 78.1% to $30.1 billion for the year. During fiscal 2011, BHP approved 11 major projects for a total investment commitment of $12.9 billion.

The company has completed its acquisition of Petrohawk Energy for $12.1 billion through a short-form merger of its wholly owned subsidiary with and into Petrohawk, under the Delaware law. The deal was closed with Petrohawk being the surviving entity. The company believes that with this transaction, BHP Billiton Petroleum is on track to deliver compound annual growth of 10% in production volumes for the remainder of the decade.

BHP's balance sheet has capacity for opportunistic mergers and acquisitions and may target copper, energy and potash, chief executive Marius Kloppers said, adding that the company may expand in shale gas outside the U.S. following the Petrohawk deal. The company will pay dividend of 55 cents per share on Sep. 29, 2011, vs. 45 cents in the year-ago period.

Of the three analysts covering the stock, 67% recommend a buy and the rest rate a hold. There are no sell ratings on the stock. Data from Bloomberg has analysts forecasting the stock gaining 26.3% to $104.40 in the upcoming 12 months.

3. Coeur d'Alene Mines ( CDE) is a primary silver producer with gold production and has assets located in the U.S., Mexico, Bolivia, Argentina and Australia. Through its subsidiaries, it is involved in the operation and ownership, development and exploration of silver and gold mining properties and companies.

For the second quarter, the company reduced its debt by 16%, while cash and cash equivalents stood at $106.8 million, increasing 159% from the same quarter last year. In an interview to TheStreet.com, CDE's chief executive Mitch Krebs said cash balance has grown to $147 million since the end of June. Net metal sales for the quarter increased 129% year-over-year to $231.1 million. Adjusted earnings stood at $58 million, or 65 cents per share, as against a loss of $8.9 million, or 10 cents per share, in year-ago quarter.

As reported by Bloomberg, chief executive Mitch Krebs believes that gold prices will march towards $2,000 and above by 2012, although the metal would experience a brief pullback in the short run. He said that the company is seeking to exploit the current price environment by carrying out exploration activities around its existing mines. For the second half of the year, the company's exploration budget has been hiked by 67% to $14 million for carrying out exploration activities in Mexico, Argentina and Nevada.

The company estimates 2011 silver production of 19.5 million to 20.5 million ounces and 240,000 ounces to 250,000 ounces of gold. Gold production is likely to boost during the second half, lowering cash operating costs per gold ounce. The company is planning an attractive dividend policy for 2012. Going forward, the company will not issue any shares as its operating cash flow is adequate to fund investment and distribution.

Of the eight analysts covering the stock, four recommended a buy and the rest suggest a hold. There are no sell ratings on the stock. Analysts polled by Bloomberg foresee the stock gaining an average 36% to $40.83 in the forthcoming 12 months.

2. Vale ( VALE) is a Brazilian diversified metals and mining company with a product portfolio that includes nickel, iron ore and iron ore pellets, manganese ore, ferroalloys, aluminum, fertilizers, copper and coal, among others. It has mineral exploration in 24 countries. In addition to being the largest logistics operator in Brazil, Vale generates and supplies electric energy to the steel sector.

For the second quarter of 2011, the company reported iron ore production of 80.3 metric tons production -- the best performance ever. Moreover, for the first half of 2011, production stood at 146.5 metric tons, almost 47% of the targeted output for 2011. Copper production for the first half increased to 133,000 metric tons compared to 74,000 metric tons in the year-ago period. During the quarter, gold and silver production was up 1,145.3% and 49.8%, respectively.

Second quarter 2011 net earnings increased 74.1% to $6.45 billion, or $1.22 per share, as compared to the same quarter last year. Operating revenue for the quarter increased 13.3% to $15.3 billion, the highest quarterly result in its history. In mid-August, the company paid an additional dividend to its shareholders totaling to $3 billion equivalent, or approximately 58 cents per share. Cash and cash equivalents at the end of the quarter stood at $13.2 billion, vs. $6.2 billion in the year-ago quarter.

Recently, it was known that Petroleo Brasileiro (Petrobras) ( PBR), Brazil's state-controlled oil giant, and Vale are in talks for a potential operation involving the miner's nitrogenous assets. As per the deal, Petrobras may obtain the nitrogenous assets in Parana state from Vale's fertilizer arm Vale Fertilizantes, in exchange for a potassium mine to which Vale is seeking rights.

Of the 23 analysts covering the stock, 87% recommend a buy and the rest rate a hold. There are no sell ratings on the stock. Analysts polled by Bloomberg expect the stock to gain an average 41.6% to $39.67 over the next 12 months.

1. HudBay Minerals ( HBM), a Canada-based diversified mining company, owns copper/zinc/gold mines, ore concentrators and zinc production facilities in northern Manitoba and Saskatchewan, a zinc oxide production facility in Ontario, a nickel project in Guatemala and a copper project in Peru.

For the second quarter of 2011, the company saw its profit before asset impairments increase multi-fold to $40 million, or 23 cents per share, from $4.4 million, or 3 cents per share, in the year-ago quarter. Revenue for the quarter soared 31.7% to $246.8 million from the same quarter prior year. Operating cash flow for the quarter almost doubled to $63.5 million, or 37 cents per share.

The company recently reported that it has completed optimization studies for its Lalor project in order to maximize value and potential. The project optimization would increase production to 4,500 tons per day from the present 3,500 tons per day. In addition, mining costs would reduce to $36 per ton from $56 per ton as of now. Milling costs would drop to $16 per ton from $24 per ton.

Looking ahead, the company believes that its operating mines are on track to meet the production and cost guidance for the remaining part of 2011, after delivering a strong performance during the second quarter of 2011.

Of the 16 analysts covering the stock, 81% recommend a buy and 13% rate a hold. Analysts polled by Bloomberg expect the stock to gain an average 54% to $19.30 in the upcoming 12 months.

>>To see these stocks in action, visit the 7 Mining Stocks to Watch portfolio on Stockpickr.

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