The mining industry plays a vital role in supplying the global economy with the metals, materials, and energy sources it needs to thrive. Iron ore, copper, and aluminum, for example, are some of the most important basic building blocks for global infrastructure. Without them, we couldn't build the things our modern society needs to function at peak performance.
Because the global economy needs the metals and materials that the mining industry produces, the sector can make a lot of money. In 2018, for example, the world's 40 largest publicly traded mining companies hauled in $683 billion in revenue and generated $165 billion in earnings before taxes, interest, depreciation, and amortization (EBITDA). Those numbers were up 8% and 4%, respectively, from 2017's level thanks to modest production growth and improved commodity prices.
Despite the sector's importance to the global economy, it has struggled to enrich investors over the years. In the 15 years from 2003-2018, the industry produced a total return of about 20% for its investors, which significantly underperformed the global stock market's more than 80% total return over that timeframe. 2018 was no different for the mining sector. While the world's 40 top mining stocks grew their earnings and paid a record $43 billion in dividends to their investors, their collective market value fell 18%.
Given the sector's relative underperformance, investors must carefully choose the right mining stocks to buy. Not only do they need to zero in on those producing the right commodities but also those with strong financial profiles and low production costs. Those factors should prove to be powerful competitive advantages as they should help increase the probability that a mining company outperforms its peers.
Digging into the best mining stocks
One of the biggest risks facing mining companies is commodity price volatility. Because metals are important to economic growth, prices move dramatically on news that demand is slowing down. That can have a notable impact on the profitability of mining companies.
Given that risk, investors need to focus on mining companies that have low production costs because that will help mute some of the impacts of lower prices. On top of that, investors should also seek out companies that have strong financial profiles, such as an investment-grade balance sheet. That will help give them the flexibility they need to get through these rough patches, which can come out of nowhere.
While having an excellent financial profile and an industry-leading cost structure is a good starting point, what matters even more is that a company mines the right materials. Coal, for example, has historically been a vital energy source for the global economy. In 2018, it supported 38% of the world's electricity generation. However, due to climate change concerns and the rapid rise of renewable energy, coal consumption is on track to plateau by 2023. Because of that, investors should consider avoiding miners that produce this commodity.
Instead, they should seek out those focused on commodities that will be in high demand in the coming years. That includes three main categories:
- Key industrial metals like iron ore, aluminum, and copper, which are vital to the overall growth of the economy.
- Precious metals such as gold, which are always in demand by investors looking to reduce risk.
- Metals that are important for modern technology applications. Lithium, cobalt, and nickel, for example, are all essential to rapidly expanding sectors of the economy like renewable energy.
While many companies have a strong financial profile, low operating costs, or produce the right commodity, few boast having all three characteristics. That makes those that do stand out as being the best ones to buy:
Top mining stocks to buy
What makes it stand out?
The world's leading lithium producer.
Barrick Gold (NYSE:GOLD)
Focused on becoming the most profitable gold mining company.
BHP Group (NYSE:BHP)
A global leader in iron ore, copper, and nickel.
Rio Tinto (NYSE:RIO)
A global leader in iron ore, copper, and aluminum.
Southern Copper (NYSE:SCCO)
One of the lowest-cost copper producers with the second-largest reserves.
Here's a closer look at why these five mining companies are the top ones to buy right now.
The best lithium stock to buy: Albemarle
Lithium is a key component of batteries used to store energy for consumer electronics, electric vehicles (EVs), and renewable power sources like wind and solar. Because of that, demand for the metal is growing at an accelerated pace. Lithium consumption increased from 175 kilotons in 2015 to 270 kilotons by 2018. It's on track to potentially top 1,000 kilotons by 2025, according to an estimate by Albemarle.
As the global leader in producing that key metal, Albemarle is well-positioned to capture this growth. The company currently has several expansion projects under way to ensure it has the capacity to meet demand. By 2021, it should be able to produce 175 kilotons of lithium per year, up from 65 kilotons in 2018.
Albemarle not only has the world's largest lithium businesses, but it's also among the lowest-cost producers. Because of that, the company's lithium business' adjusted EBITDA margin was a healthy 42% in 2019 despite weaker prices due to a temporary oversupply. The company complements its low-cost operations with a strong investment-grade balance sheet. That gives it the funds to invest in growing its lithium operations as well as its dividend, which it had increased for 25 consecutive years as of 2019.
Lithium was Albemarle's main profit driver in 2019 at around 36% of the total. However, the company gets the majority of its income from non-mining sources, which is a risk that investors should keep in mind. Its bromine specialties business, which makes flame retardant chemicals, among other things, contributed 29% of its earnings. Meanwhile, its catalysts business, which makes products used by the refining and petrochemical sectors, supplied another 31% of its profits. Those businesses expose the company to the more volatile oil industry, which could cut into some of its lithium-powered upside.
While Albemarle's diversification outside of the mining sector is a concern, it's still one of the best ways to play the growth in lithium demand. Add in its low-cost operations and healthy balance sheet, and it's an ideal mining stock to consider buying for the long-term.
The best gold stock to buy: Barrick Gold
Humans have valued gold since ancient times. While the precious metal's usage has changed over the years, it remains highly prized, especially by investors due to its ability to store wealth as a "safe-haven" investment. Because of that, gold will likely remain in high demand in the coming years, making it among the mining industry's most important commodities.
Most mining companies focused on gold should benefit from the steady demand for the precious metal. Few, however, have a concrete plan in place to leverage their production of this precious metal to enrich their investors. Most aim to increase their output in hopes of growing their profitability even if the price of gold declines.
Barrick Gold, on the other hand, has a bold vision. It's striving to be the most valued gold mining business in the world. The company intends to achieve that audacious aim by being the most profitable miner in the sector.
Instead of operating the largest portfolio of gold mines, Barrick Gold focuses on owning tier one gold assets. It defines them as mines:
- Capable of producing at least 500,000 ounces of gold per year.
- Have total cash costs in the bottom half of the industry.
- Have at least 10 years of remaining life.
Following its merger with Randgold in 2018, Barrick boasted having five tier one gold mines. It added a sixth in 2019 by combining several of its mines in Nevada into a joint venture with fellow gold mining giant Newmont Goldcorp (NYSE:NEM). In addition to gold, the company is also one of the world's 10 largest copper companies by market value.
Barrick Gold's focus on operating tier one assets has enabled it to have some of the lowest costs in the gold mining sector. For 2019, Barrick Gold estimates that its all-in sustaining costs (AISC) will be between $870 to $920 an ounce. For comparison's sake, the price of gold was slightly more than $1,500 an ounce in October of that year, setting it up to make a hefty profit. The company's AISC should decline from that range in future years. Driving it down will be the eventual sale of higher-cost mines and the cost-saving benefits as it integrates the acquisition of Randcorp and its JV with Newmont Goldcorp. Because of that, the company should still be able to make lots of money even if gold prices tumble.
Barrick complements its top-tier gold mining portfolio with a strong balance sheet. By acquiring the cash-rich Randgold, Barrick Gold enhanced what was already an investment-grade credit profile. Meanwhile, with additional non-core asset sales on the way and a business that's generating free cash flow, its balance sheet should continue to strengthen in the coming years.
While Barrick Gold has many positive characteristics, it's not without risk. Aside from the typical issues facing a gold mining company, one area that Barrick investors need to watch closely is its investments in developing new mines. The company has had its share of missteps in the past. The biggest was spending $5 billion to develop the now mothballed Pascua-Lama mine that straddles Argentina and Chile. On the one hand, Barrick seems to have learned from those costly mistakes, given its new focus on tier one mining assets. However, if the company finds itself flush with cash due to strong gold prices, it might feel the temptation to invest in second-tier projects or make a questionable acquisition. If the company starts making head-scratching investments, it might be time to sell.
Barrick, like many mining companies, has struggled to create value for investors in the past. However, it has shifted its focus from aiming to be the world's largest gold producer to striving to become the sector's most valuable company. That increases the probability that it can enrich investors over the long-term. Add in its upside to copper, and it's one of the top mining stocks to buy.
The best all-around mining stock to buy: BHP Group
Energy is essential to the modern economy. It needs electricity to power everything from homes and businesses to computers and household gadgets. On top of that, it needs liquid fuels to drive cars, trucks, buses, planes, and trains. Fossil fuels like coal and cleaner energy sources such as uranium used to produce nuclear power currently provide the bulk of the world's electricity. That makes mining companies essential to the economy's ability to thrive.
However, while fossil fuels are currently vital for fueling the economy, it's slowly transitioning away from them and toward cleaner emissions-free renewable energy. That pivot should be an even greater boon for the mining sector since it digs up many of the metals and materials crucial to building clean energy generating facilities. Base metals like copper and nickel, for example, are essential components of renewables. Copper is vital for not only wind farms and solar panels but also EVs. Nickle, meanwhile, is critical for battery storage. Because of that, companies focused on these mining these metals should thrive in the coming years.
While many companies produce the commodities needed to power the global economy, BHP Group plays on both sides of the field. It currently produces coal, oil, and natural gas, making it vital to powering today's economy. However, it also digs up uranium, copper, and nickel, which has it well-positioned to benefit from the pivot toward cleaner sources. In addition to those commodities, BHP Group produces iron ore and zinc, and is developing a mine to produce potash, which is a key food nutrient. BHP Group's diversification makes it a great mining stock to own as a core holding since it provides investors with exposure to several important commodities.
Meanwhile, BHP Group is among the lowest cost producers for many of its key metals. The company's copper business, for example, was on track to have the fifth-lowest cash costs among the large publicly traded copper producers in 2019. Meanwhile, it's working to lower the costs of its already top-tier Western Australia iron ore business by rolling out autonomous trucks. By focusing on operating large-scale, low-cost mines, BHP Group should be able to make a healthy profit even at lower commodity prices.
On top of producing many of the right metals for low costs, BHP Group also has a strong investment-grade balance sheet. The company aims to keep its net debt to between $10 billion and $15 billion, which will enable the company to maintain a comfortable leverage ratio even if commodity prices plunge. That gives it the flexibility to invest in new projects even during periods of market stress.
While BHP Group boasts many excellent characteristics, it does have some potential issues that investors should monitor. One of the more concerning is the importance of fossil fuels to its bottom line. While iron ore and copper were its biggest moneymakers in 2018 at 39% and 28%, respectively, of its underlying EBITDA, coal supplied a meaningful amount of its earnings at 19%. Meanwhile, oil and gas chipped in another 14%. Those earnings could be under pressure if the pivot toward renewables accelerates. That concern is leading BHP to consider selling its coal mining business.
Despite its exposure to the coal and oil markets, BHP Group is a great option for investors seeking a mining stock. That's because it offers broad low-cost exposure to several high-demand metals, -- including copper, nickel, and iron ore -- and has a top-notch balance sheet. Because of that, BHP Group appears well-positioned to thrive in the coming years.
The best industrial metals stock to buy: Rio Tinto
While the global economy uses lots of different metals and materials, the three it needs most are iron ore, aluminum, and copper. Iron ore is important because it's a key component in making steel. That material is vital for constructing infrastructure like buildings and bridges, as well as other items like cars, machinery, and appliances. Aluminum, meanwhile, is also quite versatile, with usage in the transportation, machinery, construction, and packaging sectors. It's also among the most environmentally friendly metals since it requires less energy to manufacture and transport products made from aluminum than most other metals. Because of those characteristics, aluminum is becoming increasingly important to the global economy. Finally, copper, as mentioned previously, is essential for electrical applications, renewable energy, and EVs.
The importance of those three metals plays right into the hands of Rio Tinto. It's a global leader in iron ore, where it was the second-largest supplier in 2018. It's also a world leader in aluminum and a top-ten producer of copper. As such, Rio Tinto checks the box as a company that produces the right commodities.
Rio Tinto is also among the lowest-cost producers for these key commodities. Its aluminum business, for example, uses low-cost hydropower to meet 65% of its electricity needs, which helps keep its costs down. Meanwhile, its iron ore business is a large-scale integrated operation in Western Australia that combines mining with rail and port infrastructure to keep costs low. Those factors enable Rio Tinto to continue making money at lower commodity prices.
Finally, Rio Tinto has a top tier financial profile. It has a strong investment-grade credit rating backed by a balance sheet that only had $4.9 billion of net debt as of the middle of 2019. That's a tiny level for a company that had a $95 billion enterprise value as of October of that year. With such a low debt level, Rio Tinto is free to use all the cash flow it generates to enrich shareholders. That including reinvesting some to grow its business by building new mines as well as returning significant amounts to investors via dividends and share buybacks.
Rio Tinto, however, does have some risks worth noting. One that investors should be aware of is that while the company mines each of the three highest demand metals, it makes most of its money on iron ore. In 2018, that metal supplied 62% of its underlying EBITDA. Aluminum was second at only 17%, followed by the company's combined copper and diamond operations at 15%. Because of its high exposure to iron ore, Rio Tinto's earnings and stock price have greater exposure to that market. That could cause it to underperform other diversified miners if the iron ore market weakened due to issues outside of the global economy, such as having too much excess supply.
Rio Tinto has a lot to offer investors. It's a global leader in iron ore and aluminum, as well as a meaningful copper producer. Add that focus on the low-cost production of those key metals to its top-tier balance sheet, and Rio Tinto appears well positioned to prosper in the coming years.
The best copper stock to buy: Southern Copper
Copper demand is on track to grow at a healthy clip in the coming years. After using 23.6 million tons of the metal last year, the global economy is on track to consume 29.8 million tons of copper by 2027, according to a forecast by Fitch Solutions. Driving that growth is the accelerated adoption of renewable energy and EVs.
Few companies have positioned themselves to prosper from copper's bright future as Southern Copper. The company controls the second-largest known copper reserves in the world, which sets it up for strong growth in the coming years. In the company's view, it has enough identified mining projects in the pipeline to more than double its output by 2026, growing it from 884 kilotons in 2018 to more than 1,800 kilotons that year.
In addition to producing the right commodity, Southern Copper boasts some of the lowest copper production costs in the sector. In 2019, Southern Copper's cash costs were on track to lead its publicly traded peers.
On top of all that, the company had a strong investment-grade balance sheet. That solid financial profile provides the company with the financial flexibility to invest in its robust pipeline of copper growth projects.
If there's one drawback to Southern Copper, it's that Mexican mining and industrial giant Grupo Mexico controls the company. In 2019, that entity held a commanding 88.9% of Southern Copper's outstanding shares, leaving just a small sliver for outside investors. That's a concern for several reasons. Grupo Mexico, for example, could take actions that don't benefit outside investors, such as attempting to take the company private at less than full market value. Meanwhile, it could make deals that benefit its other companies at the expense of Southern Copper.
While Grupo Mexico's controlling stake in Southern Copper is a concern, it's the best pure-play copper producer in the sector. That's because it combines low costs, a strong balance sheet, and unparalleled growth prospects, which makes it one of the top mining stocks to consider buying.
These mining stocks could be big winners in the coming years
The mining industry has been a challenging one for investors over the years. While it likely will remain tough in the future, that doesn't mean investors should avoid the sector. That's because it does have several bright spots that they won't want to miss.
Investors will need to dig deep to uncover the gems that can best capitalize on the sector's growth prospects. That means finding companies that produce the right metals at the lowest costs and have healthy balance sheets to give them the flexibility to navigate through the sector's challenges. While many have some of those characteristics, Albemarle, Barrick Gold, BHP Group, Rio Tinto, and Southern Copper stand out because they boast having all three in spades. That's why they're the best mining stocks to buy these days.