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Investing in Metal Stocks

Updated: March 23, 2021, 8:39 p.m.

The metals industry is a subsector of the basic materials segment, encompassing companies that:

  • Mine, process, or stream precious metals such as gold, silver, platinum, and palladium
  • Mine and process industrial metals like copper, iron ore, and aluminum ore (bauxite)
  • Convert raw metal materials such as iron ore into more valuable metal products like steel

There’s a blurry line between this sector and mining. While some metals companies operate an integrated mining business, others don’t. Here’s a closer look at this subgroup of the materials sector, and explore some of the best metals to invest in.

Best precious metals stocks

A handful of metals companies stand out as leaders in the industry. These companies focus on keeping costs down so that they can maximize the value of the metals they produce. Here’s a look at three top options worthy of an investor’s consideration:

Metals stock Role in the metals market
Rio Tinto (NYSE:RIO) A leader in producing industrial metals
Nucor (NYSE:NUE) A diversified manufacturer of steel and steel products
Wheaton Precious Metals (NYSE:WPM) A leading precious-metals streaming company

Data source: Company investor relations websites

Rio Tinto

Rio Tinto (NYSE:RIO) is a diversified global mining company. It primarily focuses on producing industrial metals, including the three most widely used ones -- iron ore, aluminum, and copper -- as well as titanium.

Rio Tinto is a global leader in producing aluminum. The company operates large-scale, high-quality bauxite mines, alumina refineries, and aluminum smelters. It’s also a leader in using low-cost, carbon-free hydroelectricity to power its aluminum operations. Rio’s also a top producer of iron ore, a key ingredient in steel (the most used metal alloy in the world). The company’s iron ore operations in Australia comprise an integrated network of world-class mining assets, processing hubs, rail lines, and port terminals, which helps keep costs low. It complements those leading operations with a large-scale copper business and meaningful titanium enterprise.

Rio Tinto focuses on integrated mining and metals operations, which enables it to keep costs down. It’s also a leader in using low-cost renewable energy to power its metals businesses. Those low-cost operations, when combined with Rio’s diversification, make it a top option for investors seeking broad exposure to the metals sector.

Nucor

Nucor (NYSE:NUE) is a diversified North American steel and steel products company. It makes steel bars, plates, and beams, and it produces steel products such as fasteners, pipes, and wire. Nucor also operates a leading scrap-metal business that recycles and transports ferrous (iron-containing) and nonferrous metals.

Nucor differs from most other steel manufacturers in that it focuses on operating minimills. These facilities use electric arc furnaces to melt scrap steel, which is less expensive than the traditional blast furnaces used to melt iron. It also powers its facilities primarily with natural gas instead of coal, which burns cleaner and costs less. Add to that its focus on using recycled metals, and Nucor is one of the lowest-cost producers of steel in the world.

The company’s relatively environmentally sustainable and lower-cost operations have enabled it to generate cash in a range of economic conditions. Because of that, it may be an ideal stock for investors seeking a lower-risk steelmaker.

Wheaton Precious Metals

Wheaton Precious Metals (NYSE:WPM) is one of the largest streaming companies in the world. As a streamer, it provides mining companies with an up-front payment to help develop a project in exchange for the right to purchase a portion of the production at a fixed cost.

Wheaton Precious Metals has a diversified portfolio of streaming contracts. Its agreements give it the right to purchase gold, silver, palladium, and cobalt from a variety of leading mining companies at currently producing mines, as well as those in development.

The company’s contract portfolio allows it to buy silver and gold at average per-ounce prices of $5.31 and $431, respectively, through 2024. It can then sell those metals at prevailing market prices, pocketing the difference. Wheaton’s low-cost business model makes it an attractive means of investing in precious metals.

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The metals industry and the economy

Metals companies largely fall into two categories:

  1. Those focused on precious metals like gold and silver
  2. Those that produce or use industrial metals such as iron ore, aluminum, and copper

So, metals companies have different sensitivities to the global economy, according to their area of focus.

Industrial metals’ demand and prices tend to rise and fall with the global economy. Thus, a recession typically causes both to fall, which can weigh on the profitability and stock prices of companies focused on producing industrial metals. That was the case in the early part of 2020, when the economy tumbled because of COVID-19, taking industrial metal demand and prices down with it.

The value of precious metals, on the other hand, tends to have an inverse relationship to the economy. In large part that’s because investors buy these metals to protect their wealth or to hedge against inflation, which is more likely to rise after central banks lower interest rates because of an economic downturn. Investors saw evidence of this during the economic turmoil of 2020, as COVID-19 sent silver and gold prices to multiyear highs.

Given the inverse relationships between these types of metals, investors might want to consider pairing a company that focuses on industrial metals with one that focuses on precious metals to help smooth out returns.

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Picking the best metals stocks to invest in

Metal prices can be very volatile, especially if economic conditions deteriorate quickly, so investors should carefully decide whether they have the risk tolerance to stomach the ups and downs. If the sector’s upside potential seems appealing, concentrate on trying to unearth the metals stocks best positioned to benefit from higher prices. The best place to start is these industry leaders since their low-cost operations should help cushion the blow if market conditions unexpectedly shift. Then hold on for what might be a bumpy ride in the short term, knowing full well that the long-term potential can make the volatility worth it in the end.

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