Metso (MXCYY, Financial)(MXTOF, Financial) is a Finnish manufacturer of mining, milling and recycling equipment. The company is very profitable, has a strong balance sheet and pays a nice dividend. You can see why it is a holding of FPA Funds.
There are 150.4 million shares and the market cap is 3.8 billion euros ($4.3 billion). The dividend in 2015 was 1.05 euros and the dividend yield was 4.1%. Americans pay a 15% withholding tax on dividends, even in retirement accounts. Earnings per share were 2.95 euros last year and the price to earnings ratio is 8.58. Earnings were abnormally high last year. The dividend will probably get cut.
Metso manufactures rock crushers, lumber milling and pulping equipment, flow controls like valves and pumps, liners for dump trucks and recycling equipment. Metso’s rock crushing equipment is used to mill the uranium that is used in China’s newest nuclear power plants. 34% of Metso’s employees are in Europe, 16% North America, 20% South and Central America, 10% China and 8% Africa/Middle East. Sales were 2.978 billion euros in 2015 and have annually decreased from 4.282 billion euros in 2012.
The balance sheet showed 590 million euros in cash and 632 million euros in accounts receivables. The liability side showed 822 million euros in debt and 469 million euros in accounts payables. Free cash flow was 341 million euros. Financials are very robust. You can see that management knows how to weather the cyclicality of the mining business. Keep cash high and debt low.
In the past five years, free cash flow has ranged from 204 million euros to 375 million euros. That is pretty impressive for a company that is in the mining business. As a reminder, free cash flow is cash flow from operations (net income plus non-cash charges such as depreciation) minus capital expenditures (money spent on property, plant and equipment). Free cash flow is truly the cash that is left over. Operating profits was 18.6% last year, EBITDA margins 19.2% and return on equity is usually in the mid-teens.
Metso recently won a contract with Chilean miner Codelco in developing its Chuquicamata mine. Metso will assist with engineering and deliver conveyors and crushers. The mine is expected to produce 10% of the world’s copper. The company also won a $31 million contract to update Tata’s soda ash operation in Wyoming.
In recent past research, I found that a lot of slightly used heavy equipment is selling for half off brand new. I looked up some of Metso’s rock crushers on auction site Ritchie Brothers (RB, Financial). I am by no means an expert in rock crushers, but some of this stuff was going for between $50,000 and a few hundred thousand dollars. It looks pretty cheap to me, which would make sense. As this equipment is used in mining and mining is down, so should the equipment.
With the decrease in mining and energy, Metso has shut down a few of its plants around the globe. Earlier this year, it shuttered a plant in Clarksdale, Mississippi and Canada. The company also laid off employees in its minerals division in Finland in January.
Metso is an impressive company. It is an interesting way to play mining and still receive dividends, have a company with positive free cash flow, high profit margins and an extremely strong balance sheet. This cannot be said for most companies in mining. Metso’s presence in recycling will not mitigate losses in minerals, but should do well with the continuing global growth. You can see why FPA Funds has bought shares.
Disclosure: We do not own shares.
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