Stock Analysis & Ideas

Here are 2 Mining Stocks That the Market Got Wrong

Story Highlights

Many investors look to mining stocks for exposure to commodities during an economic downturn, but some commodities look more attractive than others. Interestingly, Wall Street has boosted Cameco shares while selling off MP Materials, but here’s why the market has it all wrong on these two miners.

With the major indices down significantly year-to-date, investors have been left with virtually nowhere to hide. However, mining stocks have held up remarkably well, as evidenced by the SPDR S&P Metals & Mining ETF (NYSE:XME), which is up year-to-date. In this piece, we used TipRanks’ Comparison Tool to evaluate two mining stocks: MP Materials (NYSE:MP) and Cameco (NYSE:CCJ). However, the market is bullish on Cameco and bearish on MP — the opposite of what they deserve.

MP Materials has exposure to rare-earth minerals, while Cameco is the largest publicly traded uranium company in the world.

Why are Mining Stocks Holding Up Better than the Market?

Historically, the commodities market has been one place where investors seek shelter from plunging asset valuations. These safe-haven assets offer support during periods of economic and geopolitical turmoil because their valuations will never be fully wiped out. One way to get exposure to the commodities market is by owning mining stocks, which is one reason why the sector has held up better than most of the equity market.

The mining sector includes companies involved in extracting, managing, and processing naturally occurring minerals found in the Earth. These materials range from coal and industrial metals like iron to diamonds and precious metals like gold.

Rare-earth minerals, which MP Materials specializes in, fall into the mining category, and they are of particular interest right now due to the growing adoption of electric vehicles and green energy. Rare-earth minerals are commonly used in smartphones, hard drives for computers, digital cameras, LED lights, flat-screen TVs, computer monitors, and most importantly, solar panels, wind turbines, and batteries for electric vehicles.

On the other hand, uranium, which Cameco focuses on, is used as fuel for nuclear power plants and reactors on ships and submarines. Uranium also has uses in the industrial, defense, and medical spaces. Thus, while the metal has some important uses, the opportunity in those spaces may be smaller than the opportunities in rare-earth minerals. Additionally, there is currently a supply glut in uranium, which is why prices have been tumbling since their recent peak in April 2022.

Although mining is a global industry, five of the industry’s biggest companies have their headquarters in China, which may keep some investors from holding shares because they don’t want the risk of holding Chinese equities. Those same investors may be glad to hear that MP Materials and Cameco are both headquartered in North America. Still, when it comes to stock performance, these two companies are polar opposites right now.

MP Materials

What’s particularly interesting about MP Materials is that it owns and operates the only active, scaled, rare-earth mining and processing site in the United States. Despite its track record of earnings and revenue beats, the company’s stock is off almost 34% year-to-date. As a result, a bullish view of MP Materials may be appropriate, especially after reviewing its P/E and earnings trends.

MP Materials is a relatively new company, having been founded in 2017 and holding its initial public offering in December 2020. Like many recent IPOs, the company’s valuation surged during its early months before plunging. MP’s P/E peaked at around 220x in February 2021 but has since plummeted to around 22x in September 2022, making it look cheap.

Most rare-earth mineral miners are in China and are penny stocks, making them ultra-risky. As a result, MP Materials may be one of a few or potentially even the only investable stock in the space for many risk-conscious investors. Additionally, the company is growing rapidly, boosting its revenue by almost 100% in the second quarter and 177% in the first quarter.

One potential risk that should be mentioned for MP Materials is the fact that it focuses on neodymium-praseodymium, and the prices of those minerals have been declining. However, the company clearly has things going for it, as the U.S. Department of Defense awarded it a $35 million contract in 2022.

MP Materials has also beaten earnings and revenue estimates in the last several quarters. For the second quarter, MP Materials posted earnings of $0.43 per share on $143.6 million in revenue, compared to the consensus numbers of $0.35 per share and $130 million in revenue. With MP Materials being profitable, it begs the question of why its stock has sold off. Thus, this could be an attractive entry point because it looks undervalued.

What is the Price Target for MP Stock?

MP Materials has a Strong Buy consensus rating based on five Buys assigned over the last three months. At $49.00, the average MP Materials price target implies upside potential of 54.8%.

Cameco

While MP Materials has plunged in 2022, Cameco shares have skyrocketed, climbing over 29% year-to-date. Like MP, most uranium stocks are penny stocks, making Cameco one of a handful of investable names in the space for risk-concerned investors. However, unlike MP, Cameco is not profitable, making a bearish view seem more appropriate.

The company has surprised to the upside on several recent earnings reports. Cameco posted adjusted earnings of $0.14 per share on $557.6 million in revenue for the second quarter, compared to the consensus of $0.01 per share on $494.8 million in revenue.

Unfortunately, the uranium producer has a bumpy track record of profitability, posting net losses in 2020 and 2021 but positive net income in 2018 and 2019. However, it guided for positive results in 2022.

Cameco’s P/E has stood at around 88.6x recently, but it has declined steadily since its May peak at 224.4x. So, while some investors might think this makes the stock look cheap, the company’s bumpy profitability trends should give pause. The good news is that Cameco has a strong balance sheet with $1.4 billion in cash and equivalents and $997 million in long-term debt. The company also has a $1 billion credit facility that it could draw on in a pinch. Still, there are just too many question marks with Cameco.

What is the Price Target for CCJ Stock?

Cameco has a Strong Buy consensus rating based on six Buys assigned over the last three months. At $34.13, the average Cameco price target implies upside potential of 16%.

Conclusion: Bullish on MP Stock, Bearish on CCJ Stock

Wall Street has it all wrong when it comes to MP Materials and Cameco. While the market has been bullish on Cameco and bearish on MP, the reverse is more appropriate. The expected growth in the markets and materials that use rare-earth materials suggests a plethora of upcoming opportunities for MP. However, the supply glut in uranium suggests weakness for Cameco in the coming years, despite management’s promise of profits rather than losses in 2022.

Disclosure

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