Uncovering Value in the Metals and Mining Sector

Today I was looking for stocks in the basic materials sector - specifically metals and mining - that meet the following criteria:

• A price-earnings ratio (P/E) between 0 and 15.
• A price-sales ratio (P/S) between 0 and 1.
• A price-book ratio (P/B) between 0 and 1.
• A price-cash flow ratio of no more than 5.
• A current ratio of more than 1.
• An interest coverage ratio of more than 1.5.
• A low, long-term debt-equity ratio.

My criteria yielded the following stocks:Â

The first stock is ArcelorMittal SA (MT), a Luxembourg-based worldwide steel producer that is the result of a $30 billion merger between India-owned Mittal Steel and Western European steelmaker Arcelor in 2006.

With a presence in more than 60 countries around the world, ArcelorMittal is an international leader among companies that supply quality steel products to large-scale markets such as automotive, household appliances, construction and packaging.

ArcelorMittal is ranked in the Fortune Global 500 as the 123rd biggest corporation in the world for 2017.

The company’s annual crude steel production for 2016 was 90.768 million tonnes. The company is also engaged in mining, producing 55.2 million tonnes of iron ore and 6.3 million tonnes of coal.

ArcelorMittal’s operations are categorized in five segments: Europe, Brazil, Nafta, Acis and Mining. A majority of the company’s total 2016 production came from the European segment, with 42.635 million tonnes of crude steel or 46.97%. The Nafta segment is second with crude steel production of 22.208 million tonnes, Acis with 14.792 million tonnes and Brazil with 11.133 million tonnes.

The company produces – for the automotive market – 200 unique steel grades, of which Usibor 2000 and Ductibor 1000 are recognized as some the strongest steels for car manufacturing.

The stock is trading at $21.21 per share, up 32 cents or 1.53% from the previous trading day. The company has a market capitalization of $21.31 billion and approximately 1.02 billion shares outstanding.

For 2017, analysts forecast ArcelorMittal will report EPS of $2.93. This estimate combined with a forward P/E ratio of 8.10 results in a price of $23.73.

Analysts set an average target price per share of $28.95, which represents a 36.5% upside to the current market value. The recommendation rating is 2.3 out of 5.

GuruFocus gives ArcelorMittal a financial strength rating of 6 out of 10 and a profitability and growth rating of 4 out of 10.

The second company is Harmony Gold Mining Co. Ltd. (HMY, Financial), a mid-tier gold miner headquartered in South Africa. In South Africa, the company operates nine underground mines, one open-pit mine and several surface operations. In Papua New Guinea, the company operates Hidden Valley in a 50% joint venture with Newcrest Mining Ltd. (ASX:NCM, Financial).

The miner produced 1.08 million ounces of gold in fiscal 2016 and has approximately 36.9 million ounces in gold reserves.

For fiscal 2017, which ends June 30, the company guides to produce 1.05 million ounces of gold. The company produced 812,192 ounces in the first nine months of the year. Of this, 20% is exposed through short-term forward sale contracts to the volatility of the gold market.

Harmony Gold is currently trading around $1.70 per share, up eight cents or 4.94% from the previous trading day.

The average target price per share is $2.56, which represents a 50.6% upside from the current share price. The recommendation rating is 3.3. The rating ranges between 1.0 (Strong Buy) and 5.0 (Sell).

The stock has been downtrending since April and has lost 23% year to date.

GuruFocus gives Harmony Gold a financial strength rating of 5 out of 10 and a profitability and growth rating of 6 out of 10.

Disclosure: I have no positions in any stock mentioned in this article.