What happened

It's turning out to be a nerve-wracking week for metals and mining stocks, with many breaking their winning streak that started this year and falling precipitously. Here's how some of the largest stocks from the sector are performing as of 1:45 p.m. EDT Friday:

There's a common link between all these stocks: They're industrial metals producers, dealing in base metals, which also explains why they're tumbling.

So what

The meteoric rise in metals stocks this year can be attributed to surging prices of metals. But wait, that's an understatement: Prices of iron ore, copper, steel, and aluminum, in fact, hit record highs some weeks ago. Here's a quick overview of the metals and materials the five stocks primarily deal in.

Stock Primary Product
Alcoa Aluminum
BHP Iron ore, copper, nickel, metallurgical coal
Freeport-McMoRan Copper
Vedanta Iron ore, zinc, copper, lead, steel
Companhia Siderurgica Nacional Steel

Data source: Company presentations. Table by author.

Strong demand from the world's top metals consumer, China, propped up prices even as the reopening of global economies after last year's COVID-19 pandemic shutdowns and expectations of an infrastructure bill under the Biden administration offered support. With governments also pumping trillions of dollars into stimulus packages, demand for commodities shot up. 

Within months, several mining stocks were earning their highest profits and cash flows ever, reducing debt aggressively and doling out bumper dividends. 

A miner working at an underground mine.

Image source: Getty Images.

Alcoa, for example, reported its highest-ever quarterly profit in July since becoming an upstream aluminum company after its split in 2016. Its numbers fueled several analyst upgrades on Alcoa shares. Vedanta, the India-based diversified oil and gas and metals company, generated a record quarterly profit in its last quarter as well.

This week, BHP reported record free cash flow worth $19.4 billion for its financial year ended June 30, 2021 and announced its highest-ever final dividend of $2 per share. With that, BHP returned a whopping $15 billion to shareholders in just the past year. BHP is now also about to sell its petroleum business in a multi-billion dollar deal, which should shore up its cash balance even more. 

Freeport-McMoRan isn't too far behind. Earlier in the year, it adopted a fixed-and-variable hybrid dividend policy under which it aims to pay out an annual base dividend of $0.30 per share and a variable dividend on top of that once the company achieves a net debt target of $3 billion to $4 billion. By the end of June, the copper giant had already hit a net debt of $3.4 billion.

Companhia Siderurgica Nacional, the largest integrated steel producer in Brazil, also hit its net debt target last quarter as its cash flows hit a quarterly record.

So why are these stocks plummeting this week despite such impressive operational performances?

BHP Chart

BHP data by YCharts.

Unfortunately, prices of base industrial metals are sinking almost as swiftly as they surged. Picture this: On August 19, iron ore prices slumped to eight-month lows, dropping almost 40% from their record highs in May, dragging steel prices along as steel is made from iron ore. Copper prices too are hitting six-month lows even as I write this.

Meanwhile, fears of the Federal Reserve tapering bond purchases are also weighing down on metal prices as reducing bond-buying typically boosts the U.S. dollar, making dollar-priced commodities like metals more expensive for buyers from outside the U.S.

In short, the performance of cyclical, commodity stocks largely follows commodity prices, and that's exactly what's happening with metals and mining stocks right now.

Now what

The sky-high prices of metals weren't sustainable, but prices should stabilize. Aluminum and copper are more sought after than ever given their use in lightweight, electric vehicles, while iron ore and steel are key raw materials used in construction, which makes for a compelling investing proposition under Biden.

Most importantly, many of these mining stocks are much better placed to ride out the cyclicality now that they're flush with cash and have strengthened their balance sheets significantly in recent months. That's something investors may want to keep in mind before dumping their shares in fear.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.