2 mining stocks that could be
The latest U.S. rail traffic data shows that metal ore and metal volumes were down 19.7% this week and more than 5% year-over-year.
While much of the slowdown in metals traffic can be attributed to supply chain issues, it also suggests that demand is waning.
Falling demand for precious and industrial metals is a leading indicator of an upcoming economic downturn.
Source: Association of American Railroads.
One could double down on the argument by paying attention to the US Treasury yield curve, which is showing signs of inverting. An inverted yield curve has successfully predicted recessions on many occasions because it essentially describes the implied economic environment.
In the event of a recession, metals and mining stocks will likely capitulate. As such, here are two stocks to avoid.
The first is Sibanye Stillwater Ltd. (SBSW, Financial), which faces headwinds from all sides. The company’s operations in South Africa came to a halt when its employees went on a prolonged wage strike. Additionally, South Africa is struggling with electricity problems as many of the country’s power plants are shut down and its employees are also on strike, demanding higher wages.
Additionally, a flood in the state of Montana eroded a road leading to one of Sibanye’s palladium mines, halting mine operations for the next six weeks.
Finally, although Sibanye is undervalued on some fronts, the stock is trading at 1.22 times its book value. Mining companies often hover around their fair book value due to the tangible nature of their assets. Thus, there is a strong argument that the stock is overvalued on a relative basis.
Although Newmont Corp. (NMS, Financial) owns various copper assets, the company is still considered a pure gold mining play. So, given the rising US dollar in a rising interest rate environment, we will likely soon see the price of gold decline.
Backing up my request for a lower gold price, Phillip Streible, Chief Market Strategist at Blue Line Futures, said: “Gold is unlikely to see any upside unless inflation deteriorates enough to halt interest rate hikes or if other central banks start being as aggressive as the Fed, and that can weaken the dollar.”
Newmont’s first quarter results showed an 8% year-over-year production decline, which speaks volumes about demand as production was expected to increase amid reopenings post-pandemic. The company produced 1.34 million ounces in the quarter for revenue of $3.02 billion and earnings of 56 cents per diluted share.
Additionally, the stock is overvalued on a relative basis as it trades at 2.15 times book value, 46.27 times earnings and 3.75 times sales. Additionally, Newmont is trading below its 10, 50, 100, and 200-day moving averages, conveying a downtrend.
Key indicators and financial theory suggest that both Sibanye Stillwater and Newmont are likely to underperform. Specifically, metal prices, implied industrial production and market cyclicality all point to the downside for both stocks.