FQVLF - PICK: Undervalued Metals And Miners ETF Yields 6.7%

2023-03-31 04:47:08 ET

Summary

• The iShares MSCI Global Metals & Miners ETF is down 17.6% over the past year. That presents an excellent opportunity for investors.
• The PICK ETF pays distributions twice a year and with the price drop now has a TTM yield of 6.7%.
• Meantime, the fund appears to be perfectly positioned to benefit from the global clean-energy and EV transition.
• Top holdings include BHP, Rio Tinto, Glencore, Freeport-McMoRan, and Nucor. The expense fee is 0.39%.

The iShares MSCI Global Metals & Miners ETF ( PICK ) has delivered a -12.4% total return over the past 12 months, significantly lagging the broad market averages as represented by the Vanguard S&P 500 ETF ( VOO ), the SPDR DJIA ETF ( DIA ), but outperforming the Nasdaq-100 Trust ( QQQ ) (see graphic below). This is a great opportunity for investors who have little or no exposure to the mining sector as the global transition to clean-energy and EVs is now really accelerating. This fund is significantly undervalued and yields 6.7% to boot. The PICK ETF could easily return 25% plus over the next 12-months and still be significantly undervalued. Read on to find out why.

Investment Thesis

As you all know, the clean-energy and EV transitions are not going to happen without key metals like copper, nickel, and lithium (not to mention a hand-full of others). Copper demand, for instance, is set to soar:

As can be seen in the graphic above, the IEA estimates that global copper demand is expected to rise from 23.9 Million-tons ("Mt")/year in 2020 to 33.4 Mt by 2040, or +40%. And the clean-tech sector is a primary reason why (i.e. the orange dots). NOTE: the IEA presents two different development scenarios in the graphic above, and I went with the sustainable estimate on the right-hand side).

Demand for nickel is expected to grow even faster considering its critical role in EV battery manufacturing. Reuters reports that mining giant Vale ( VALE ) expects global nickel demand to grow by 44% by 2030 as compared to 2022 demand "due to high demand for use in batteries that power electric vehicles." VALE also estimates that global copper demand is expected to rise by ~20% by 2030 to 37 Mt (or significantly higher than the IEA estimate presented above).

Regardless of what the estimates are, it is clear that the planet is going to need a significantly increased supply of copper, nickel, lithium and a host of other metals in order to pull-off the global clean-tech and EV transitions. That being the case, let's look at how the PICK ETF has positioned investors for success going forward.

Top-10 Holdings

The top-10 holdings in the PICK ETF are shown below and equate to what I consider to be a relatively concentrated 50.6% of the entire 261 companies in the fund:

You can find more detailed information on the holdings and the fund itself from the iShares PICK ETF webpage .

The #1 holding with a 13.9% weight is global mining giant BHP Group ( BHP ). BHP is a $152 billion market-cap resources company with operations in Australia, Europe, China, Japan, India, South Korea, the rest of Asia, North America, and South America. BHP mines copper, silver, zinc, molybdenum, uranium, gold, iron ore, and coal. The company is also involved in the mining, smelting, and refining of nickel. BHP yields 8.7% and trades with a forward P/E = 15.9x. The stock is down 9.7% over the past year.

Rio Tinto ( RIO ) is the #2 holding with a 6.8% weight. RIO yields 7.4% and operates Copper and Minerals Segments that mine aluminum, copper, iron ore, diamonds, gold, silver, molybdenum, and lithium. Just today Rio and First Quantum ( OTCPK:FQVLF ) announced a joint venture to develop the La Granja copper project in Peru - one of the largest undeveloped copper deposits in the world.

Leading copper producer Freeport-McMoRan ( FCX ) is the #5 holding with a 5.2% weight. Freeport is up nearly 29% since my initial Seeking Alpha BUY-rated coverage last October (see Freeport-McMoRan : Why ConocoPhillips' CEO Sold Oil & Bought Copper ). In a nod to its copper production, FCX advertises itself as "Electrifying the Future", but note - as this slide from the Q4 presentation shows - the company also produces significant quantities of gold and moly:

As you can see, FCX estimates it will sell 1.7 million ounces of gold this year, and - in case you have missed it - gold has been on a strong rally over the past 5-months:

That, combined with a rise in copper prices, likely bodes well for FCX's upcoming quarterly report.

Charlotte, NC based steel company Nucor ( NUE ) is the #7 holding with a 3.5% weight. Nucor should be a beneficiary of the President Biden's Infrastructure Act and earlier this month raised its flat steel prices by $150/st, setting a minimum hot-rolled coil price of $1,150/st . Nucor stock is relatively flat over the past year and currently trades with a forward P/E of only 10.4x.

Another steel company - Steel Dynamics ( STLD ) - rounds out the top-10 holdings with a 1.8% weight. Last month, STLD raised its quarterly dividend 25% to $0.425/share . The stock is up 32% over the past year.

For the portfolio as a whole, the PICK ETF is most exposed to the diversified minors, with significant pure-play bets on steel and copper:

Performance

Now, I readily admit the PICK ETF has a pretty poor 10-year total returns performance track record as compared to the broad market averages:

As you can see, the PICK ETF has significantly lagged all the major market averages. However, the clean-tech and EV transition is in its infancy, we are still pulling out of the global pandemic, and China has just begun its "re-opening". I feel the combination of all these catalysts, along with a very attractive valuation level (see bellow), means we can throw out the past because in my opinion the world is transitioning to a new-era of metals and mining demand pull.

Valuation

As I mentioned in the title, I consider the PICK ETF to be significantly undervalued given the critical nature of the metals the companies in the portfolio produce:

Note the comparison of the PICK ETF with the current valuation metrics of the S&P500: P/B = 4.07x ; P/E = 21.65x ; Yield = 1.65%.

Yes, the miners are a cyclical industry and typically do trade at a discount to the S&P500, so that is really nothing new. However, what is new is the rapid rise and strong growth in demand due to the clean-tech and EV transition. And that is pushing up prices. Yet given the significant valuation discount to the broad market, I would argue that the PICK ETF could easily rise 25% over the next year and still be significantly undervalued. Throw in the dividend, and you've got a 30%+ total return.

Risks

The risks, of course, is that the global economy could end up in a recession due to a number of potential catalysts: Putin's war-on-Ukraine drags on, and that war is what effectively broke the global energy & food supply chains. That has led to global inflation and to the U.S. Federal Reserve having to raise interest rates. All of this could lead to a global economic slowdown, a de-acceleration of the clean-tech and EV transition, and lower demand for the metals that the miners in the PICK ETF produce. That, of course, would lead to a lower metal's prices and lower stock prices for the companies in the PICK ETF.

On the other hand, upside catalysts include strong demand for steel, copper, nickel, and other metals from a re-opening China and from the U.S. due to strong governmental tailwinds from the Infrastructure Act, the Clean-Energy Act (also known as the "IRA"), and from the CHIPS & Science Act. My bet is that this thesis wins the day.

Summary & Conclusion

I like the PICK ETF portfolio and I like its strong semi-annual distributions, the last two of which are shown below:

For investors looking for a combination of strong income and diversified exposure to the metals that are going to power the clean-tech and EV transition, the PICK ETF deserves your consideration. I rate the PICK ETF a BUY.

I'll end with a 3-year total returns comparison of the PICK ETF versus some of its competitors: the Global X Copper Miners ETF ( COPX ), the VanEck Rare Earth Metals ( REMX ), the Amplify Lithium Battery ETF ( BATT ), and the SPDR Materials ETF ( XLB ):

As you can see, the COPX and the REMX ETFs have outperformed the PICK ETF by a significant margin. That's the primary reason my "metals category" picks for my personal portfolio are a combination of the Freeport-McMoRan stock and the PICK ETF.

For further details see: