In times of economic and political uncertainty, many investors have historically turned to safe-haven assets such as precious metals and minerals. These materials are used in various applications, including jewelry making, industry, technology, aviation, and aerospace. Therefore, owning the stocks of companies involved in the exploration, extraction, and sale of metals and other minerals is one way to gain exposure in the mining sector.
Due to Russia’s invasion of Ukraine in February, the prices of many commodities, including metals and precious minerals, skyrocketed. This is because both countries play a major role in the steel and iron industries and are also significant fertilizer producers. The war is causing upward pressure and significant gains in these mining stocks, sparking the interest of many investors who want to increase their investment portfolios.
According to IBIS World, mining companies in the United States contribute more than $500 billion annually to the economy. Therefore, it should come as no surprise that mining stocks are among the most sought-after investments on Wall Street. On the other hand, the New York Stock Exchange (NYSE) alone has 79 precious metals mining companies, not to mention different types of miners and stock exchanges.
So, what are the common types of mining stocks, and which are the best ones on the market today? This article will provide all the essential information to address these questions and enable you to make an informed investment decision.
Types Of Mining Stocks
Mining stocks can be divided into the following categories based on the raw materials the individual stocks deal with:
Base Metals: These are common and inexpensive metals used for a wide range of industrial applications. For instance, they are essential raw materials in the construction, electrical, and technology sectors. Iron ore, lead, nickel, zinc, copper, molybdenum, aluminum, and cobalt are the most popular base metals.
Precious Minerals: These are rare natural sources with a very high monetary value. As a result, we frequently use them as jewelry or as a form of currency (silver coins and gold bars). Gold, platinum, silver, and palladium are some of the most precious metals.
Energy Materials: They are extracted from the earth and burned to generate energy. Coal is the most common material, which is processed and turned into fossil fuel. Uranium is a vital nuclear power source, while bitumen (a tar-like substance mainly found in Canada) is processed into crude oil.
Minerals: These are pure chemical compounds found in nature. Potash, gypsum, talc, quartz, calcite, diamonds, and salt are typical examples of minerals extracted.
Building Materials: They are rocks that are used in the construction industry. Building aggregates such as limestone, stone, sand, and granite are common.
We can make another fundamental distinction of mining stocks by looking at the various types of mining companies and their market capitalization:
Large Mining Corporations: These are well-capitalized firms with decades of experience in global operations and a slow but consistent cash flow. These companies’ mining stocks are frequently not volatile.
Small Mining Firms: They typically have less capital compared to the latter, a short operational history, and high expectations for massive returns in the future. Mining stocks in these companies are typically more volatile.
With this information, an investor can decide which mining stocks to consider. However, it is advisable to diversify your portfolio by not allocating all your capital to a single stock or only one type of these companies; since, as the saying goes, do not put all your eggs in one basket.
4 Mining Stocks To Highly Consider
1. Gold Stocks
Companies looking to find gold are among the most sought-after. The truly fascinating thing about gold is that, despite economic downturns, individuals continue to spend money on both physical gold and gold stock investments.
It is mainly because gold typically appreciates regardless of how the rest of the economy is doing. Therefore, investing in these mining stocks is less likely to disappoint since gold serves as the global standard for value.
2. Platinum Stocks
Every investor worth their weight in metal knows there is a pecking order to which metals are prioritized when investing in mining stocks. Everyone takes the necessary steps to invest in gold stocks, but platinum stock investments are frequently overlooked. People are not entirely aware of the value associated with platinum, despite it being one of the most valuable metals in the world and a symbol of success.
3. Lithium Stocks
By 2022, the demand for lithium is expected to outpace mining firms’ current production rates. Analysts predict that assuming significant changes in technology, by 2050, usage may be up to 170% more than the known lithium reserves. To uncover additional lithium resources, miners must therefore intensify their exploration efforts.
To meet increasing demand, mining companies must search for and build new mines that supply the lithium needed in the renewable energy sector. However, this increase in demand may be an ideal opportunity for potential investors to capitalize on the current market for lithium stocks in the financial industry.
For instance, batteries require materials like cobalt and lithium. Therefore, the rapid adoption of electric vehicles and the expansion of wind and solar power plants is an advantage for miners and investors of lithium. It is because battery storage, which heavily relies on lithium, will become more and more necessary to fill in the energy gaps created when the wind is not blowing, and the sun isn’t shining.
4. Copper Stocks
Despite having a tertiary place in the mining industry’s culture since bronze is an alloy made of copper, this metal plays a crucial role in developing electric vehicles. According to a Reuters study, the conductivity level of pure copper is second only to silver,
The introduction of hybrid and battery-powered automobiles has increased the quantity of copper wiring necessary to operate these cars. Therefore, it only makes sense to think of Southern Copper as one of the resource stocks you should keep an eye on.
Consider Mining EFTs (Exchange-traded Funds)
There is another way to invest in the mining sector if you don’t have the expertise or time to conduct the research required to find and maintain a well-diversified portfolio of individual stocks. Therefore, if you are among this group of investors, we advise you to explore exchange-traded funds.
These funds pool investment dollars from many investors, then use the funds to make significant investments in a diverse range of specific stocks based on the prospectus for the fund. ETFs are popular among investors because they provide low-cost and simple ways to expose your portfolio to the types of stocks you want without conducting extensive research on each stock you invest in.
ETFs are available in many industries and investment portfolios, and mining is no exception. A quick search on your preferred search engine will reveal several mining-focused funds with the potential to deliver impressive returns.
4 Techniques For Selecting The Best Mining Stocks
Before selecting the specific mining stocks and shares to purchase, potential investors should be familiar with these industry-specific financial measures companies use to gauge their growth.
l AISC (All-in Sustaining Costs)
Gold producers use this metric to formulate the price associated with producing an ounce of gold. It accounts for all mine operating expenses, including royalties, production taxes, refining costs, and company expenses, including general, administrative, and exploration expenses. Investors may see how much it costs the business to create one ounce of gold with this indicator.
l By-product Credits
Miners will sell their unprocessed metals to third parties for further processing, saving themselves the expense of converting them into finished goods, and use the proceeds to cover the extraction costs for their primary line of operation.
For instance, copper deposits frequently contain trace amounts of gold, silver, molybdenum, and zinc, all of which miners will sell to recoup the cost of producing the processed copper.
l Cash Costs
Also known as the actual cost of producing metals like copper or gold, this is another item that mining companies will include in their total cost of operations report. This indicator is distinct from AISC or costs fewer by-product credits because it only considers costs associated with mines.
l EBITDA
This abbreviation stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Employing this metric, firms can effectively communicate their principal profits to investors.
The Best Mining Companies To Consider
As a result of the COVID-19 pandemic, which caused lockdowns and a labor shortage, the mining industry, like many others, encountered severe economic challenges. Fortunately, some of the best stocks in this industry were able to endure the setback.
This paved the way for what many see as an opportunity, and as the global economy recovers, so will the mining stocks. Below are three mining companies that have the potential to become market leaders.
1. Barrick Gold Corporation (NYSE: GOLD)
This company is one of the world’s largest gold miners, with a market capitalization of more than $32 billion. Although the company’s headquarters are in Canada, it has mining projects in 12 countries worldwide, including Argentina, Chile, Canada, and the Dominican Republic.
Although the COVID-19 pandemic had a significant impact on the firm since their stocks lost more than 35% of their value, the stock market prices were able to recover. Nonetheless, many see this as an opportunity; after all, the company has outperformed earnings estimates for the past four quarters, with solid net income growth and earnings in 2022’s second quarter.
2. Franco Nevada Corporation (NYSE: FNV)
While Franco Nevada does not manage its mining operations, it is a significant player in the mining industry. Since its inception in 2007, the company has rapidly grown to become one of the world’s leading gold royalty and streaming firms.
It is costly to set up and operate a gold mine, and many companies do not have the cash to cover the costs. This is where Franco Nevada becomes involved by providing the necessary upfront funds to cover these expenses, but not for free. The company requires one of two things in exchange for the upfront funding:
A Royalty Contract: Royalty agreements grant the company a portion of the revenue generated by the sale of gold obtained at the mine. When the mine begins to produce gold, the mining company handles extracting and selling the precious metal, and FNV receives a percentage of the profits.
A Streaming Contract: Streaming agreements function similarly to royalty agreements, with one major exception. These agreements grant the firm funding the mining project the right to buy a portion or all of the gold produced at the mine at a reduced price. The financier can then profitably sell the gold it purchased at a relatively lower price on the open market.
Franco Nevada’s business model has proven to be successful. In less than a decade and a half, the company has grown to a nearly $26 billion market capitalization and has one of the industry’s most robust balance sheets.
3. Rio Tinto Ltd. (OTC: RTNTF)
Rio Tinto is very different from the two other companies on this list. Their stocks trade on the over-the-counter market (OTC), which most investors should avoid. However, unlike most OTC stocks, Rio Tinto is not a penny stock in its early stages of development. With a market cap of nearly $115 billion, it is the world’s second-largest mining company.
As one of the world’s largest companies, the firm is known for delivering appealing financial results, and its 2022 second quarter was no exception. The company generated $16.54 billion in revenue during the quarter, an increase of 70.87% year on year. Net income was even more impressive, coming in at $6.16 billion, representing a 271.32% year-over-year increase.
Of course, with such incredible growth in net income, their profits were spectacular, coming in at $3.78 per share for a growth rate of 270.59%. In addition, the company outperformed on all other key metrics. Net profit margin, operating income, cost of revenue, and net cash change all increased by double or triple-digit percentages.
Issues Affecting The Mining Sector
The mining industry has long served as a conventional inflation hedge in an environment of geopolitical instability, rising inflation, and high-interest rates. The sector is anticipated to expand at a CAGR of 12.9% by 2026 and reach a market value of $3.35 trillion.
Although these figures appear encouraging, the mining industry nevertheless faces several difficulties. In 2022, the mining industry will need to deal with some risks, including supply chain challenges, ESG requirements, political uncertainty, and a trade war, which predicts KPMG’s 2022 Mining Outlook.
Final Thoughts
The mining sector is among the fastest-growing industries in the world, and this trend is expected to continue. Without miners, the resources needed to build high-rise buildings, manufacture and maintain electric automobiles, or even make jewelry would be practically impossible.
However, it is essential to extensively research before investing in mining stocks, as with any other industry. After all, no two businesses are created equally, and no two companies possess the same market valuation.
