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The metals and mining sector is notoriously volatile, thanks to the fickle nature of commodity prices. Because of that, investors who are in the market to buy miners should seek out the top producers since their larger scale helps them weather industry cyclicality because of their ability to drive costs lower. Leading the way are the five miners listed on the chart below:
|
Mining Company |
Enterprise Value |
Top Producer by Metal |
|---|---|---|
|
Vale |
$81.2 billion |
Iron ore |
|
Freeport-McMoRan |
$37.5 billion |
Copper |
|
Barrick Gold |
$29.8 billion |
Gold |
|
Alcoa |
$22.5 billion |
Aluminum |
|
Silver Wheaton |
$12.8 billion |
Silver |
Data source: Barrick Gold, Coeur Mining, Freeport-McMoRan, Vale, and Alcoa.
Digging into the top mining stocks
Brazilian miner and leading iron ore producer Vale (VALE 3.79%) produced more than 350 million metric tons of iron ore last year, accounting for more than 10% of global output. That scale gives the company more flexibility than its rivals. For example, the company has been adjusting its production to maximize its margins amid the currently weak iron ore environment. As a result, Vale had the highest EBITDA generation of any iron ore business through the first half of this year. That scale is only expected to grow as the company completes its $19.5 billion S11D expansion project, making it a top choice for iron ore investors.
While Freeport-McMoRan (FCX 2.85%) is not the world's largest copper producer, it is the largest publicly traded producer. Furthermore, given its portfolio of world-class mines, Freeport-McMoRan has ample capacity to expand production in the future to capture a growing share of the copper market. In fact, the company has five mines that have the potential to produce 1 billion pounds of low-cost copper per year. It is that leading position and unmatched upside that makes Freeport-McMoRan such a compelling mining stock in the copper sector.
Barrick Gold (ABX 2.95%) is the world's largest gold mining company, producing an average of 5.5 million ounces a year and boasting the world's largest reserve base at 91.9 million ounces of gold. While the company is actively working to boost its output via several exploration projects, one of its top aims is to get its costs down so that it can cash in on its scale advantages. While it is already the lowest-cost senior gold producer at an all-in sustaining cost of $1,010 an ounce, Barrick Gold wants to get that number below $700 an ounce by 2019, as it grows production from its lowest-cost mines. That low-cost production growth, when combined with the company's unmatched reserve base, makes Barrick Gold the first mining stock gold investors should consider.
Demand for aluminum is projected to double between 2010 and 2020 because of the metal's growing importance in the automotive and aerospace industries. That plays right into the hands of Alcoa (AA +0.00%), which is the largest global bauxite producer and the world's leading producer of alumina, the key ingredients in aluminum production. More importantly, that scale provides the company significant cost advantages. That has enabled Alcoa to improve its margins and profitability even though aluminum prices are down substantially from the peak.
Silver Wheaton (SLW 5.47%) does not actually own or operate any silver mines. Instead, the silver streaming company became the largest producer by investing in silver mines owned by others, which gives it the rights to a portion of the future production of those mines. As a result, Silver Wheaton controls about 5% of the silver market. That share has the potential to grow in the future as its streaming partners bring new mines online and it acquires additional streams. Furthermore, Silver Wheaton's streaming agreements lock in its costs, making it one of the highest margin precious metal producers in the world. Needless to say, investors who have taken a shine to silver should take a close look at Silver Wheaton.
Investor takeaway
The mining sector is pretty fragmented, which gives investors lots of options. That said, because commodity prices are so volatile, investors are better off considering the top producers. Their larger scale tends to lead to lower costs, which puts them in a better position to handle the ups and downs of the mining industry's cyclicality.
