Thematic investing: mining stocks

Commodities
Investments

With the recent commodities boom, and even before, traders and investors alike have been adding fresh seams of mining stocks to their portfolios.

Unfamiliar with what they offer and how to pick them? Take a read of our thematic investing guide to the world of mining.  

How you can invest in mining stocks 

Digging into the mining sector 

Metals and minerals are key components of modern economics and manufacturing. The world can’t turn without them.  

As such, mining firms’ goods often go through periods of intense demand. We’re seeing this with right now lithium, for instance, thanks to the increasing global shift away from ICE-powered cars toward electric vehicles. Lithium is an important ingredient in battery construction, so the metal is in high demand.  

Taking a wider view, the mining industry is forecast to grow worldwide at a CAGR of 7% from now until 2025, according to Research & Markets. By that time, the sector will be worth a total of approximately $2.5 trillion.  

For 2021, y-o-y growth is looking particularly strong, forecast at 12.4%, giving the mining sector a value of $1.8 trillion by the year’s end. 

But there’s the rub. Mining is a cyclical industry. It rises and falls according to the whims of the market. If manufacturing is down, for example, then demand for metals and minerals usually falls too. 

Mining is also capital intensive. It can cost hundreds of millions, even billions, of dollars to set up new operations or to refurbish existing mines. Timing is everything. In the past, mining firms have poured money into new mines, only for them to come online just as a market downturn kicks in. 

Mining stocks, therefore, require a bit of deeper digging before investors or traders start buying. In the long term, you’d need ideally be investing in miners that are capable of weathering economic storms. Strong balance sheets and low production cuts are key markets to watch for. 

If you’re pursuing a short-term strategy, then you’ll need to do some more immediate research.  

Gold mining stocks, for instance, will be tied in with the gold price. Prices hit record highs in August 2020, reaching over $2,000, but have subsequently retreated, although gold did crack the 100-day moving average to take prices above $1,800 on May 6th, 2021. 

At the time of writing, copper is breaking all-time high records as part of a global commodities rally. Iron ore and steel are at peaking too, and aluminium continues to build on significant gains. 

But while these sectors are rising, others could be looking at long term decline. Take coal stocks for instance. While coal remains an important resource in the developing world, especially China, coal’s share of global power generation is forecast to fall to 22% by 2040. That’s still quite a significant chunk, but the greener the world gets, the less it will rely on coal for power. As such, coal miners may incur substantial drops in their revenues, profits and share prices as the 21st century progresses. 

Choosing mining stocks 

We touched on this earlier, but two key takeaways when looking at mining stocks are: 

  • Low production costs – Running a mine is expensive, so “low” is a relative term here, but you should be eyeing up companies that run mines as efficiently as possible. Try and avoid those with outdated equipment or ageing extraction sites. It is not a hard and fast rule, but generally speaking, a mining firm with low production costs can stay profitable during weaker cycles. 
  • Strong balance sheet – A miner with a strong balance sheet will, in theory, offer competitive earnings per share. Look for those companies with investment-grade bond ratings, high borrowing capacity, manageable debt and plenty of liquidity.  

Potential mining stocks for your portfolio 

Barrick Gold 

Canada’s Barrick Gold is one of the largest gold miners in the world and a global leader in copper production too. 

Its balance sheet has been bolstered in recent years by several mine sell offs. The company instead is focussing on its “Tier One” operations. These are mines that produce more than 500,000 ounces annually with at least 10-year lifespans, delivering total cash costs per ounce in the lower half of the industry cost curve. 

Feeding into this strategy is the current commodities boom with gold, and especially copper, performing strongly. Barrick’s Q1 2021 earnings, reported on May 5th, showed an 8.8% year-on-year increase for the quarter ended March 31st, totalling $2.96bn. Profit came in at $538m ($0.30 per share), against $400m ($0.22 per share) in Q1 2020. 

As a gold mining stock, Barrick is the perfect example of low-operating costs combined with a strong balance sheet. But it’s also an example of how cycles can affect mining stock prices. In this case, Barrick sold less gold by volume in Q1 2021 than the previous year, but because of the increase in gold prices, it was able to turn a higher profit.  

Orica 

When undertaking thematic investing, don’t just limit yourself to miners and mineral extractors. Consider business areas around mining, like machinery suppliers, IT solutions and software producers, or, in the case of Australian multinational Orica, explosives.  

Orica is the world’s largest commercial explosives manufacturer. The last three years have not been kind to the share price, dropping a cumulative 25% in that period.  

At the start of April, Orica shares had dropped 16% y-o-y. As of May 7th, 2021, however, its share price had begun to rise once more. 

This may be in line with the global mining growth forecast by Research & Markets amongst other commentators. More mining activity points towards a higher demand for mining-tooled explosives. Orica also appointed a new CEO, Sajeev Gandhi, in February 2021, which may have started to boost investor confidence. 

In the long term, Orica investors are up 1.1% per year over the past five years up to 2021. Looking to the short term, the explosives mining sector is up 40% according to Simply Wall Street. Paired with expected growth in mining overall, Orica could be one to watch. 

Rio Tinto 

Rio Tinto is a global mining leader. With operations mining iron ore, gold, copper, diamonds, its portfolio ensures a steady supply of revenues, and its size and general management expertise helps it weather market downturns. 

At the time of writing, as mentioned above, the world is experiencing a commodities boom. This has paid off for Rio Tinto, with its core businesses of copper, iron ore, and gold benefiting from the uptick in global metal prices. 

In terms of shares, Rio Tinto has been building on solid gains across 2020, which are being further reinforced by strengthened commodities trading. In the six months leading up to April 23rd, RIO shares had jumped 40%, reaching around 6000p on the FTSE 100. Flash forward to May 10th, RIO was trading at approximately 6660p. 

Forbes reports the Trefis Machine Learning Engine, which identifies trends in a company’s stock price data for the last ten years, has forecast similar advances for Rio Tinto over the next 6 months. Returns could potentially be as high as 12% across 2021. 

Rio Tinto improved its dividend in February 2021 reflecting strong trading across 2020. The dividend hiked 26% to 557 cents per share after the miner added a special pay-out of 93 cents to the full-year dividend of 464 cents. 

In addition to solid trading and the bump from heightened commodity prices, other aspects are at play helping reinforce RIO. It has made strides towards cutting carbon emissions, for example, and is even aiming at net-zero carbon emissions by 2050. That plays well with environmentally conscious investors. 

Mining stocks – caution still advised 

Remember: investing and trading comes with risk. You can make money, but you can also make substantial losses. When investing in gold mining stocks, or other mining company shares, be sure to do your due diligence. Only invest if you can afford to take any potential losses. 

Miners charge higher on commodity boom, cable breaks 1.40

Morning Note

European markets are off to a slow start with early gains largely erased within the first half hour of trade. The FTSE 100 holds higher than 7100 with miners leading the gains as commodities continue their monster rally on tightening supply and soaring demand. Rio Tinto and BHP are both up more than 3% in early trade, whilst Fresnillo, Antofagasta and Glencore all up around 2%. Commodity prices continue to surge as copper hit a fresh record high, whilst oil prices rose as a ransomware attack shut the Colonial pipeline, which supplies half the fuel for the US east coast. Iron ore in China surged 10% to a record high, whilst steel rose 6% to limit up. There could be a lot of speculative buying and trading pushing commodities higher but for now there does still seem to be a lot of momentum behind the trade and reasons to think fundamentals will continue to support.

 

A weaker-than-expected jobs report in the US caused some waves, but Wall Street rose to record highs as investors wagered slower growth in the labour market would only see the Fed keep policy easier for longer. In short it will allow the Fed to keep its foot to the floor but the wage component indicates trouble as inflation could outstrip employment growth. The more you pay people not to work, the less you incentivize the employment growth you seek. US futures indicate Wall Street will open a fraction higher later today.

 

Sterling jumped to its strongest since late February as the dust settled over the spate of UK elections on Thursday and a weaker dollar resulted from the nonfarm payrolls miss. Boris Johnson’s position looks secure, Labour is in disarray and Nicola Sturgeon has regained control of the Scottish parliament. Near-term worries about a second referendum on Scottish independence appear to have retreated somewhat. The SNP are biding their time not pressing ahead immediately on a referendum (even most pro-indy voters don’t think it’s the most pressing matter). And as argued last week, the current Conservative government will not sanction a referendum. It’s likely to end up in court and see a major constitutional battle before there is even a vote. For now, sterling traders can afford to ignore the noise and focus on the near-term economic trends. With the break of 1.40 at last bulls can consider the Feb 24th peak at 1.4250. 

 

On this front, the jobs report on Friday has dollar vulnerable even as the bond market recovered from the initial kneejerk. Whilst we should not be reading too much into a single jobs report, if the market is taking it at face value, then it means easier Fed policy for longer. We’re looking at the ECB and BoE tightening before the Fed, despite the monster economic recovery in the US and injection of enormous fiscal stimulus.  The prospects of a hawkish Jackson Hole taper move by Powell have clearly diminished. Minneapolis Fed president (and arch dove, we should note) Neel Kashkari said the labour market remains in a ‘deep hole’ with somewhere between 8 and 10 million jobs still lost since the pandemic started. ECB speakers (Kazaks and Lane) have made it clear policymakers will look the asset purchase programme again in June and this could involve scaling back the programme if the economic situation is better.  

 

A couple of items for the ‘you can’t make it up’ category: Bill Hwang, whose Archegos Capital family fund recently spectacularly blew up, provided seed funding to Ark Invest, the fund’s founder Cathie Wood revealed in an interview. Meanwhile Dogecoin – beloved canine ‘joke’ crypto – tumbled by a third after Elon Musk’s appear on Saturday Night Live, a comedy programme in the US. The technoking of Tesla and self-proclaimed Dogefather called the coin a ‘hustle’.  

 

Oil rose with the cyberattack on the Colonial pipeline sparking the US government to enact emergency legislation to enable fuel products to be transported by road. This won’t be enough to match the pipeline though and we could start to see some serious backing up in refined products. With any clear details or timetable for reopening we could see pressure build in some of the refined products. Heating oil gapped up to its highest in more than a year, currently up more than $2 at $203, having opened more than $5 higher for a new post-pandemic high. 

 

Shares in Greggs rose 8% as it raised its profit guidance for the year after it saw a strong recovery in sales at the start of the year. The company said it believes that “profits are likely to be materially higher than its previous expectation and could be around 2019 levels in the absence of further restrictions”. Sales picked up noticeably in the weeks since the reopening of non-essential shops on April 12th, whilst the company has also been buoyed by delivery sales. But with 40%+ gains YTD and the stock trading at a record high, good news may be well and truly baked into this one. 

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