Which Mining Stocks Beat the Competition?

Economic moats, or sustainable competitive advantages, are extremely difficult to find in the basic materials sector. Analysts reveal which ones have succeeded

Elizabeth Collins, CFA 28 October, 2013 | 9:35AM

Economic moats, or sustainable competitive advantages, are extremely difficult to find in the basic materials sector. Less than 40% of the companies we cover in this sector carry our narrow or wide moat rating. When we are able to find sustainable competitive advantages in basic materials, the primary reason is a durable cost advantage. Indeed, more than 70% of basic materials companies with an economic moat have a sustainable cost advantage. We think cost advantages can be created or destroyed in eight ways: economies of scale, economies of scope, low transportation costs, natural resources, process, bargaining power with suppliers, access to raw materials, and political regime.

We examined our universe of basic materials companies with narrow or wide economic moats as a result of notable cost advantages and determined through which of the eight ways each company had obtained its sustainable cost advantage. We found that natural resource endowments, transportation cost advantages, and economies of scale are the most common characteristics of basic materials companies that have an economic moat thanks to cost advantage.

Companies with attractive valuations and the rare distinction of an economic moat include mega-miners BHP Billiton (BLT), Rio Tinto (RIO), and Vale (VALE); coal producers Cloud Peak (CLD) and Peabody Energy (BTU); cement producers HeidelbergCement (HEI), Holcim (HOLN), and Lafarge (LG); uranium miner Cameco (CCO); Eldorado Gold (ELD); steel producer Nucor (NUE); and fertilizer giant PotashCorp (POT).

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BHP Group PLC2,269.50 GBP0.00
Cameco Corp19.97 CAD0.00
Eldorado Gold Corp13.33 CAD0.00
HeidelbergCement AG65.48 EUR0.00
LafargeHolcim Ltd50.16 CHF0.00
Nucor Corp59.82 USD0.00
Nutrien Ltd53.96 USD0.00
Rio Tinto PLC6,187.00 GBP0.00
Vale SA ADR16.90 USD0.00

About Author

Elizabeth Collins, CFA  is an associate director of equity research with Morningstar.

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