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.