Similarly, when management ramps up capital spending, it’s a strong indicator of confidence that the underlying business is growing. In fact, there’s no better forecaster for future profit growth. Investors, however, tend to view such moves skeptically, almost always waiting for signs that spending is paying off before buying stock. In fact, capital spending in an uncertain business climate often triggers selling, particularly when it involves raising debt and/or equity capital.

That’s definitely the case in the mining industry today for virtually every metal or mineral. Fears that China is entering a prolonged period of slower growth–coupled with still-jagged growth in the US and a likely EU recession in 2012–have sent resource prices skidding in recent months.

Mining stocks, meanwhile, have fared even worse, including shares of the biggest and strongest companies. Our Metals and Mining Portfolio holds four of these multi-national, multi-product companies: BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RIO), Vale (NYSE: VALE) and Xstrata (London: XTA, OTC: XSRAY).

These companies are to mining what super oils like ExxonMobil Corp (NYSE: XOM) are to energy. The globe is their area of operation. Their immense cash flows enable them to go further and deeper than anyone else in the mining business, and they produce almost everything from industrial metals such as copper and zinc to metallurgical coal and iron ore used to manufacture steel.

No single regulation, tax, political setback or unsuccessful project is enough to bring them down, no matter how large or grievous. In fact, governments who nationalize their assets always wind up regretting the decision with lost productivity and profits. And every other company in the natural resources industry is a potential takeover target.

A contracting global economy will affect super miners’ earnings and share prices, just as it will with every other mining company. And super miners aren’t always successful with their expansion plans, as BHP’s failed takeover attempt for Canada’s Potash Corp of Saskatchewan (NYSE: POT) in 2010 demonstrated. They’re rarely the biggest winners from a rising market either. But at the end of every cycle, these miners emerge ever more powerful and ready to move aggressively on the global stage–even as rivals often falter and diminish.

These super miners are the bedrock of any Metals and Mining Portfolio. And if you’ve been waiting to buy them, this is yet another golden opportunity.

BHP’s NYSE-listed American depositary receipts (ADR), for example, trade in the low-70s, versus a high of nearly USD105 in mid-April. Rio Tinto’s ADRs now sell for less than USD50 after selling for more than USD70 until August and well over USD110 in May 2008. Vale ADRs are in the low 20s after holding at the low 30s until late July and well over USD40 in May 2008.

Xstrata’s London-based shares have once again slipped under under GBP1,000, versus GBP1,400 plus at mid-year and GBP2,400 in May 2008. Its ADRs are somewhat less of a mouthful at under USD3, half off the mid-summer high and barely one-fifth of August 2008 levels.

Whether you’re counting ADRs or London shares, that’s a steep decline for any company, no matter how historically volatile the industry. Xstrata, however, has continued to grow its production with successful mine expansions, new exploration and timely acquisitions. This year’s ramping up of copper output is a good example of this track record of success.

Copper prices have been extremely volatile this year, as investors have worried that Europe’s woes would dampen global economic growth and hence demand for copper. But Xstrata’s copper mining unit, Xstrata Copper, has grown output by the equivalent of 9 million tonnes, or 10 percent, drawn from operations in Argentina, Australia, Canada, Chile and Peru. It’s also advanced major development projects in South America, the Philippines and Papua New Guinea.

Xstrata Copper CEO Charlie Surtain expects the company’s global production of the red metal to surge more than 50 percent by the end of 2014, with abundant opportunity to expand even further. That’s based on the company’s belief that long-term copper demand will continue to grow alongside economic development in Asia and South America. What’s more, the firm has been consistently willing to put its money where its mouth is to capitalize, despite current uncertainty and volatility in global markets.

Xstrata has budgeted USD19.5 billion in capital spending on growth through 2014, in addition to USD2 billion to USD2.5 billion on “sustaining” or maintenance capital spending. Coal is another major focus for Xstrata, with management targeting 50 percent-plus output growth over the next five years. That includes development of both thermal coal used in power generation and metallurgical (met) coal used to make steel. The company is the largest thermal coal exporter globally and the third-largest met coal exporter.

Xstrata is also the world’s largest integrated zinc producer, with 100 percent vertical integration. That’s a major advantage over other producers when it comes to controlling costs. The challenge here is replacing existing output. That also appears to be true of nickel (of which the company is the world’s fifth-largest producer) as well as alloys and platinum group metals (PGMs).

The markets for all of these products are highly sensitive to the pace of economic growth. The fact that Xstrata has been able to pursue an aggressive development strategy–as well as robust dividend growth–amid an uncertain economy is a testament to the strength of the overall enterprise. The October installment of the twice-annual dividend was 2.6 US cents per ADR, up from a penny one year ago.

Meanwhile, a combined USD1.05 billion in debt maturities for 2012 represent just 2.4 percent of market capitalization. They also have coupon rates that average several percentage points below the yield-to-maturity for Xstrata’s 30-year debt. That implies substantial savings when the company refinances next year, if it doesn’t just elect to pay them off with cash in the bank.

In a best-case scenario, abating fears over sluggish economic growth will bring money back into commodity prices in 2012. That will boost Xstrata’s profits from sales of everything from copper and metallurgical coal to PGMs–and bring back buyers of its now-depressed shares. Most analysts covering the stock seem to agree: 23 have rated Xstrata a buy, seven have rated the stock a hold and two have recommended that investors sell the stock.  

In a worst-case scenario, the global economy weakens under strains from the eurozone crisis and commodity prices remain depressed. But the market has already priced that outcome into Xstrata’s share price, limiting potential downside and promising big upside gains when growth eventually returns.

Xstrata shares are a solid buy for investors, either in London up to a price of GBP1,500 or up to USD5 for the company’s ADR. We also rate BHP Billiton’s ADR a strong buy up to USD100; Rio Tinto’s ADR a strong buy up to USD60; and Vale’s ADR a strong buy up to USD40. 

Source: Xstrata