3 Mineral Mining Stocks to Avoid in 2013


Santa may have gone back to the North Pole until next year, but I'm always making lists and checking them twice to find out which companies have been naughty and nice. With our calendars having rolled over to the new year, it's time we take a closer look at the mineral mining sector.

Just as we examined three mineral miners that look poised to prosper in 2013, let's also turn our attention to three notable exceptions in the mining space that you might be better off avoiding altogether this year.

James River Coal
Last year we witnessed the demise of Patriot Coal which could no longer handle the precipitous fall in coal prices and rising costs associated with coal mining. This could be the year that James River Coal either follows in its path or gets considerably closer to following in Patriot's footsteps.

James River Coal, as of its most recent quarter, had $172 million in liquidity available and recently repurchased $61 million in debt for 39 cents on the dollar - a figure that prompted investment rating company Moody's to downgrade James River's credit rating to Caa1, since its repurchase qualifies as a "limited default" under its rating criteria. Given that James River Coal has averaged around $100 million in capital expenditures over the past three years, and has been cash flow positive in only two of the past eight years, I'm seriously concerned about its ability to generate cash if coal prices and demand remain weak throughout 2013.

Another factor that can't be overlooked is President Obama's stance toward coal companies. Tougher regulations could be in order for struggling coal producers like James River and Arch Coal . Fortunately for Arch, it's signed multiple export agreements to help boost demand and reduce any weakness from thermal coal demand within the United States. James River, without any substantial deals in place, could be in for a miserable 2013.

Harry Winston Diamond
Many mining investors may be focused on that which shines yellow and silver, but we shouldn't forget that equally sparkly, and significantly pricier, nuggets known as diamonds are also hot commodities. Next year could be a particularly rough year for jewelry stores like Tiffany, which cater to the high-end consumer, as China's slowing growth, Europe's austerity measures, and new tax hikes in the U.S. loom large to raid upper-income earners' discretionary funds. It could be a markedly tougher year for extremely high-end diamond dealers like Harry Winston.

Harry Winston's stake in the Diavik Mine in the Northwest Territories could be its one saving grace this year, although the rising cost of mining could bite into whatever margin benefits the mine provides. Since peaking in February 2012, diamond prices have been on an almost perpetual decline, shedding more than 7% of their value according to data available on Diamond Search Engine. For Harry Winston, which deals in extremely high-end jewelry, this is bad news because it's pushing the value of premium diamonds down and its primary customer is being pushed away from making large purchases because of unfavorable growth and tax rates. At 26 times forward earnings, this stock appears ripe for a big pullback.

Avalon Rare Metals
I actually happen to think the big two in the rare-earth elements, or REE, space, Molycorp(NYSE: MCP) and Australia's Lynas Corp., are poised for a rebound in 2013, but the same can't be said for Avalon Rare Metals which is stuck in developmental purgatory.

As my Foolish colleague Travis Hoium has noted on multiple occasions, REE prices have whipsawed since 2010 and now sit, in some cases, 90% below their 2011 highs. Increased supply from Lynas and Molycorp, as well as slowdown in tech demand from Japan, put a kibosh on any supply issues the REE sector had been dealing with prior to 2012. That bodes very poorly for Avalon which has been boasting some of the largest REE reserves in the world but won't be producing a darn thing until at least 2015! In an interview with Resource Intelligence, Avalon CEO Donald Bubar made it very clear that accelerating the production date simply isn't feasible.

To me, the $1.2 billion in capital expenditures being spent to get Avalon's operations up and running may be the most economically unfeasible scenario, especially if REE prices fail to rebound. What I don't understand is why an investor would choose Avalon, which is years away from producing a dime in revenue, over Molycorp, which has its mining operations up to spec and is ready to compete with China's REE production. Avalon is one I'd keep my distance from this year.

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The article 3 Mineral Mining Stocks to Avoid in 2013 originally appeared on Fool.com.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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