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Investing in Mining Stocks

By Matthew DiLallo – Updated Jul 19, 2022 at 11:50AM

Mining stocks are publicly traded companies focused on finding, extracting, and processing deposits of valuable minerals and materials. These substances include:

Four industrial trucks and machines in a mining area with piles of raw material
Image source: Getty Images

Many of these metals and materials are crucial to the global economy. Industries need the raw materials to build and manufacture goods, products, and infrastructure. When the economy is expanding, mined materials are in high demand, which boosts prices.

However, the mining industry is cyclical. Demand for mined materials tends to fall when the economy slows down. Mining stock prices typically decline during a recession. That’s a concern for investors in 2022 given the worries that surging inflation will force central banks to raise interest rates, which could tip the global economy into a recession.

One factor causing inflation is Russia’s invasion of Ukraine. Both countries play a major role in the iron and steel industries and are significant fertilizer producers. If the war continues, it could keep the upward pressure on those commodity prices.

Given the mining industry’s cyclicality, investors need to focus their attention on mining stocks that can weather future economic storms. Let's dig into some of 2022’s best mining stocks and take a closer look at investing in the mining industry.

Top mining stocks to buy in 2022

These are some of the top mining companies:

Company Description
Barrick Gold (NYSE:GOLD) Gold and copper mining
BHP Group (NYSE:BHP) Diversified mining operations
Rio Tinto (NYSE:RIO) Industrial metals mining

Source: Company websites

Here's a closer look at these top mining companies.

1. Barrick Gold

Barrick Gold is one of the largest gold miners in the world, with operations in more than a dozen countries. It's also a leading copper producer.

One thing that sets Barrick Gold apart from other precious metals companies is its focus on Tier One mining assets. It defines a Tier One mine as one that:

  • Produces more than 500,000 ounces per year.
  • Has at least 10 years of productive life remaining.
  • Delivers total cash costs per ounce in the lower half of the industry cost curve.

Tier One mines produce a relatively steady supply of low-cost gold and copper, enabling Barrick to continue making money when prices are low.

Barrick Gold’s Tier One mines can generate lots of cash, allowing it to pay an attractive base dividend payment that it complements with a quarterly performance dividend payment that fluctuates with its cash balance.

Data source: Barrick Gold.
Performance Dividend Level Threshold Level Quarterly Base Dividend Quarterly Performance Dividend Quarterly Total Dividend
Level I Net cash <$0 $0.10per share $0.00per share $0.10per share
Level II Net cash>$0 and <$0.5B $0.10per share $0.05per share $0.15per share
Level III Net cash>$0.5B and <$1B $0.10per share $0.10per share $0.20per share
Level IV Net cash >$1B $0.10per share $0.15per share $0.25per share

2. BHP Group

BHP Group is a diversified resources company. It operates fully integrated mining assets that extract and process copper, iron ore, coal, nickel, zinc, and potash. Its mining assets span the globe. BHP Group also had an oil and natural gas business but merged those assets with Woodside Petroleum (NYSE:WDS) in a deal that closed in 2022. The merger transformed BHP into a pure-play mining company.

Although BHP Group produces several commodities, it primarily aims to be a low-cost producer. It efficiently operates large resource-rich mines and uses technology such as autonomous vehicles to reduce costs. The mining company's focus on minimizing expenses also helps to mute the impact of inflation.

BHP Group combines its low-cost operations with a strong balance sheet, which it strengthens by routinely selling its least-profitable mines and non-core assets.

The mining company is well-positioned to invest in high-return expansion projects even when commodity prices are low. Its production volumes are relatively stable. Although there’s some variability to its cash flow, BHP’s low costs enable it to generate free cash flow to reliably pay dividends and repurchase stock.

Like Barrick, BHP Group’s dividend has some variability. The company pays out at least 50% of its profits each reporting period in dividends, so its dividend outlay will rise or fall with its cash flow.

3. Rio Tinto

Rio Tinto is a diversified mining company. It's a leading producer of the three most-consumed industrial metals -- iron ore, aluminum, and copper. Rio Tinto also mines a variety of other metals and minerals, including boron, salt, diamonds, and titanium.

Like BHP Group, Rio Tinto aims to be a low-cost producer of metals and minerals. It's able to keep costs down by operating mining assets that are integrated and big. Rio Tinto's investments in new technologies, such as autonomous vehicles and renewable energy, reduce costs and increase productivity.

Rio Tinto has proven its ability to make money even during weak market conditions. It has a strong balance sheet and routinely sells non-core mines to reallocate cash to better opportunities. For example, in recent years, it has exited the coal mining business due to the sector’s dwindling prospects amid climate change concerns. Meanwhile, in 2022, it offered to buy the outstanding shares of copper miner Turquoise Hill Resources (NYSE:TRQ) that it doesn’t already own. The deal would simplify its ownership of the massive Oyu Tolgoi mine in Mongolia, making it easier to develop its extensive copper resources.

The company regularly expands its best mines and aggressively repays debt. Rio Tinto is another mining company that pays dividends to shareholders and repurchases its own shares throughout the economic cycle. It tries to pay 40% to 60% of its cash flow in dividends, with payments varying each period depending on its earnings.

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Should you buy mining stocks?

The mining industry is cyclical and capital-intensive. Mining companies have more money to invest in new mines and expansion projects during periods of economic expansion. However, the long lead times required to complete projects often cause problems for mining companies. Projects developed during boom times frequently don’t come online until after the cycle changes, which affects returns.

Investors in mining stocks should also pay close attention to the amount of debt carried by a mining company. Companies with high amounts of debt often struggle during economic downturns, while companies with low production costs are the most profitable and least likely to heavily rely on debt to fund growth.

Given these challenges, investors should focus on the top mining companies. They have proven their ability to generate profit regardless of economic conditions. If you are comfortable with some volatility and if receiving dividends is a priority for you, then adding some high-quality mining stocks to your portfolio might be the right move.

Mining Stock FAQs

Are mining stocks a good investment?

Investors in mining stocks should be keenly aware of both the mining industry's cyclicality and its capital-intensive nature. The best mining companies have proven abilities to generate profit regardless of economic conditions. If you are comfortable with some volatility, and, if receiving dividends is a priority for you, then adding some high-quality mining stocks to your portfolio might be the right move.

Can I invest in gold?

There are many benefits to buying gold stocks instead of the physical metal. Gold companies can likely generate higher total returns than simply an investment in physical gold because, when the price of gold rises, these companies can expand their operations and their profits. This growth should enable their stocks to outperform the price of gold. But not all gold stocks outperform the price appreciation of the precious metal, which means that investors need to choose their gold stocks carefully.

Matthew DiLallo has positions in BHP Group Ltd. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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