StockRanks In The Mining Sector

The mining sector has been one of the market's worst performing sectors during the past month, with the S&P/TSX Global Mining Index falling 11.1%, compared to the S&P 500's decline of 1.6%.

Nevertheless, as is the mantra of famous value investors like Warren Buffett, the time to buy is when there's blood on the streets. And right now there are plenty of opportunities within the mining sector for investors to take advantage of. Here's a selection of miners that score highly in the StockRanks.

Biggest is best

The price of iron ore has collapsed 41% so far this year, no good news for iron ore producers. However, iron ore miner and one of the world's largest mining companies, Rio Tinto is not worried. At present, the company has a StockRank of 98, thanks to the fact it's relatively cheap (ValueRank 78) and has strong price and earnings Momentum (90). The company trades at a forward P/E of 9.0 compared to the industry mean of 13.7 and supports a dividend yield of 4.5% compared to the industry mean of 2.2%.

As one of the world's largest mining companies, Rio is able to achieve impressive economies of scale, which translates into a high QualityRank of 88. For example, Rio is able to mine iron ore, its key commodity at a price as low as $21 per tonne, compared to many competitors which mine at costs in excess of around $60 per tonne. As a result, Rio has an industry leading return on capital (industry median: -9.0% vs. RIO: 7.0%) and operating margin (industry median: -4.8% vs. RIO: 13.8%).

Small-cap market

In the small-cap part of the mining sector, Gem Diamonds scores highly in the StockRanks with a ranking of 98. The company has a three month relative strength of 36.5% - strongly outperforming the market. Gem outperforms its peers on many quality metrics. Specifically, the company's ROCE (19.3%) is the 8th highest in the metals and mining industry. Further, Gem's operating margin (34.6%) is 424% higher than the market average (6.6%).

These sector-leading qualities can be attributed to the company's business of mining and selling diamonds, which is a specialist, but highly lucrative operation. The company's EBITDA margin was 47% for the six months ended 30 June 2014. This performance was boosted by the company's average selling price per carat mined, which was 58% higher during the first half of this year to $2,747.

The average was raised by the firm's discovery of three diamonds greater than 100 carats recovered – a 162.0 carat, a 161.3 carat and a 132.6 carat, achieving a total sales value of US$21.0 million, 14% of first half revenue.

Impressive growth

With a StockRank of 97, Griffin Mining is another small-cap miner worth taking a look at. Griffin has put in a great performance over the past six years, growing revenue at a compound annual growth rate of 17.3%, while operating profit has expanded at a much faster CAGR of 45.6% over the same period.

Griffin's success lies in the company's tight cost control, which has been the key driver behind margin growth. As the company's production has slowed, cost cutting and tight spending control has kept profits rising.

As an example, for the six months ended 30th June 2014 Griffin's revenue declined 1.2% year on year, although operating profit and net profit increased 26% and 35% respectively. In effect, this means that management has been able to successfully implement real, substantial cost cuts. In comparison, many of the company's peers have been struggling to reduce costs while the price of metals fall.

These impressive metrics mean that the company has been able to outperform the market over the past year by 32.0%, giving a MomentumRank of 87.

Loss making

Gold and silver miner, Coeur Mining Inc has also been hit by the falling price of precious metals recently. The company's StockRank has hit a low of 24 thanks to a poor MomentumRank of 19. The company has underperformed the index by 61.4% year to date.

As a relatively high-cost small-cap gold and silver miner, Coeur is struggling as the company grapples with falling precious metals prices. Coeur can't control the price that it is able to sell its silver and gold at, so the company is at the mercy of the market. For example, during the second quarter Coeur's all-in sustaining costs per silver equivalent ounce was $19.89, while the company was only able to achieve an average selling price of $19.60 per ounce.

As a result, the company scores badly on almost all financial metrics with a negative ROE (-35.3%) and ROCE (-30.0%).

Value hunting

As a value investor, I'm always on the lookout for undiscovered value gems. So, with a ValueRank of 94, Cliffs Natural Resources Inc has caught my attention. Unfortunately, Cliffs has poor quality (59) and momentum (29) ranks as the company has a one-year relative strength figure of -55.6%. This can be attribute to the falling price of iron ore, Cliffs' main source of income.

Further, investors are betting against Cliffs, as the company is struggling to maintain its current level of debt and has relatively high production costs compared to peers, such as Rio, as mentioned above. It cost Cliffs around $70 to produce a ton of iron ore during the second quarter, bad news considering the price of iron ore recently fell below $80 per ton level.

Cliffs has a high level of gross gearing (57.3%), quick ratio of less than one and an interest coverage ratio of less than one, indicating that Cliffs can't cover short-term liabilities or cover debt interest costs. So, for these reasons, despite the company's attractive valuation, I'm going to stay away.

The bottom line

Hopefully, this brief analysis of what's hot and what's not in the mining sector will give you some ideas to take advantage of the sector's recent underperformance.

However, these information is only intended to act as a starting point for further research and you should always do your own research before initiating a position. And of course, if you have any ideas or reflections on the above information, the StockRanks or informative insights, please leave a comment below.