Mining stocks have held up better than most during the COVID-19 market meltdown, but it's a few of the smaller underperformers that are catching the eye of experts recently.
While it's the mining giants like Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) that have been in the spotlight for outperforming the S&P/ASX 200 Index (Index:^AXJO) in this bear market, investors looking for a bigger bang for their investment dollars will have to look at the smaller players.
There are two that have been lagging, although they may not be for much longer.
Rare strategic asset
The first is rare earths miner Lynas Corporation Ltd (ASX: LYC). The company is in the headlines after it announced on Wednesday that it was awarded a Phase I contract by the US Department of Defence (DoD).
The contract will pay Lynas and its partner Blue Line to draw up detailed plans for a US-based Heavy Rare Earth separation facility.
Rare earths are used in a wide range of electronics – from mobile phones and electric vehicles to military hardware and weapons.
COVID-19 more a blessing than curse
Almost all processed rare earths come from China and the coronavirus only serves to highlight the need for the US to be self-reliant.
Lynas is the only non-Chinese rare earths producer of any scale. I've pointed out the strategic importance of Lynas before and UBS echoed a similar view following the DoD award, which was also given to rival MP Materials.
Both companies will compete to win a Phase II contract to build a pilot plant before Phase III where the US government will pay for the winner to build a commercial facility on US soil.
Worth more than its earnings
The thing is, Chinese investors hold a 10% stake in MP Materials and that's making some Washington officials a little nervous, according to the Australian Financial Review.
This gives Australian-based Lynas extra points given the close strategic partnership between our countries, in my view.
This is why I think it's a mistake to only value the LYC share price on spot prices of its commodities or discounted cash flow (DCF). These measures don't reflect a price premium which should be included when valuing the stock.
No lightweight
Another underachiever that might find support is the Alumina Limited (ASX: AWC) share price. Demand for aluminium is taking a coronavirus-sized kick to the gut.
Let's also not forget that the lightweight metal is used extensively in aircraft manufacturing and no airlines are buying new planes now.
The latest quarterly earnings report from its joint venture partner Alcoa prompted brokers to lower their earnings forecast yet again for Alumina, but many are still sticking to their buy recommendation on the stock.
Finding a floor
Credit Suisse is one that is keeping its bullish recommendation on the stock.
"Whilst we're seeing the pressure play out right through the value chain, imbedded in what seems to be a pretty decent floor in the AWC share price is the asset quality (unit costs now <US$200/t), balance sheet position and still a reasonable yield despite the softer expectations," said the broker.
The broker's price target on the stock is $1.80 a share and its forecasting a dividend yield of nearly 6%.
