There are several factors that have triggered a change in sentiment for metal and mining stocks. With expansionary monetary policies, inflation fears have translated into higher portfolio allocation toward metal and mining stocks. Further, with gradual global economic recovery, it’s very likely that demand for industrial commodities will increase. It’s not surprising that metal and mining stocks have surged in the last few quarters. Even with this rally, the sector has several attractive stocks to buy with a medium- to long-term investment horizon.
This column will discuss seven metal and mining stocks to buy at current levels. I have focused on precious metals that stand to benefit from rising inflation. Additionally, my focus is on commodities that have multi-year tailwinds because of the de-carbonization theme. These commodities include copper and lithium. Of course, with China’s economic growth accelerating, iron ore-mining companies stand to benefit.
With this overview, let’s take a deeper look into the stocks to buy from the metal and mining sector.
- Freeport-McMoRan (NYSE:FCX)
- Newmont Corporation (NYSE:NEM)
- Rio Tinto (NYSE:RIO)
- BHP Group (NYSE:BHP)
- Lithium Americas (NYSE:LAC)
- Hecla Mining (NYSE:HL)
- Southern Copper (NYSE:SCCO)
Metals and Mining Stocks to Buy: Freeport-McMoRan (FCX)
Copper prices have been surging higher, and there are expectations that copper can touch $15,000 in the next few years. Without a doubt, FCX stock is the best copper play. In the last one-year period, the stock has surged by 360%. However, if the positive momentum sustains for copper, there is more upside for the stock.
For the current year, Freeport expects copper sales at 3.85 billion lbs. Sales are expected to increase to 4.4 billion lbs. annually over the next two years. Therefore, the company stands to benefit from higher price realization and incremental production. Freeport also expects to report higher gold production and sales over the next few years.
It’s also worth noting that the company reported operating cash flow (OCF) of $1.1 billion for the first quarter of 2021. This would imply an annualized OCF of $4.5 billion. The company has a capital expenditure target of $2.3 billion for the year. With strong free cash flows, Freeport is positioned for continued deleveraging. As of Q1 2021, the company had $4.6 billion in cash and equivalents.
A strong financial profile would imply higher dividends and possible share repurchase. From a valuation perspective, FCX stock trades at a forward price-to-earnings (P/E) ratio of 15.7. Valuations therefore seem attractive even after a big rally in the last year. Therefore, the stock is among the top names in the metal and mining sector.
Newmont Corporation (NEM)
With expansionary monetary policies continuing, high to very high inflation is a possibility. Therefore, it makes sense to consider exposure to physical gold or gold mining stocks. NEM stock is possibly the best bet in the gold mining sector.
An important point to note is that Bitcoin (CCC:BTC-USD) seems to be facing regulatory headwinds. With a swift flow of funds within asset classes, gold is likely to be a beneficiary of fund outflow from cryptocurrencies. Bitcoin is also being considered among inflation hedges.
NEM stock is trading at 52-week highs. However, the stock still trades at a forward P/E of 24. In addition, the stock is offering an attractive dividend yield of 3%. Given the positive outlook for gold, further upside seems likely.
Specific to the company, Newmont has high-quality assets. Importantly, the company has a project pipeline that will ensure stable production over the next decade. At the same time, the company expects to improve the all-in sustaining cost (AISC) to $800 to $900 an ounce within the next few years. Even if gold trades at $2,000 an ounce, Newmont will be positioned to deliver robust cash flows.
For Q1 2021, the company paid a dividend of 55 cents as compared to 14 cents in Q1 2020. Clearly, cash flows have swelled with higher gold price, and I expect dividend growth to sustain. Overall, Newmont Mining has world class assets, strong fundamentals and an attractive cost profile. These factors make NEM stock worth considering even at current levels.
Metals and Mining Stocks to Buy: Rio Tinto (RIO)
RIO stock is also in my list of top stocks to buy from the metal and mining sector. At a forward P/E of 6.4 and a dividend yield of 5.5%, RIO is too cheap to ignore.
In the metal and mining space, it’s always important to look at the balance sheet, considering the cyclical nature of the industry. Rio Tinto closed FY2020 with net debt of $0.7 billion. Further, for the year, the company delivered free cash flow of $9.4 billion. Given the strong financial profile, RIO stock is worth holding when the global economic activity seems to be accelerating.
In particular, the company is likely to benefit from strong iron ore prices. With China’s economic growth back on track, the iron ore price is likely to remain firm. Additionally, the company’s EBITDA (earnings before interest, taxes, depreciation and amortization) also stands to benefit from higher copper prices.
Further, over the next three years, the company has a planned annual capital expenditure of $7.5 billion. A high sustaining and development capital expenditure is likely to ensure that the company’s production profile remains strong.
BHP Group (BHP)
BHP stock is another quality dividend stock from the metal and mining sector. The stock currently offers a dividend yield of 4.3% and is among the top stocks to buy for income investors.
As an overview, BHP Group deals in the mining and production of petroleum, copper iron ore, coal and nickel. With a focus on de-carbonization, the company believes that the demand for copper, nickel, potash and steel will surge. As an example, the world will need four times more nickel over the next three decades. BHP is therefore a de-carbonization play among metal and mining stocks.
From a financial perspective, BHP reported EBITDA of $14.7 billion for the first half of FY2021. For the same period, the company’s FCF was $5.2 billion. While the company’s net debt is still at $11.8 billion, strong FCF will help in deleveraging.
It’s worth noting that iron ore and copper sales remain the EBITDA and cash flow driver. Further, the company is increasingly moving toward liquids in the petroleum sector. This is likely to deliver results in the form of higher EBITDA margin in the coming years.
In terms of growth, BHP had four major projects under development as of March 2021. These projects have a combined budget of $8.5 billion. These projects in petroleum, iron and potash are likely to deliver incremental growth.
Metals and Mining Stocks to Buy: Lithium Americas (LAC)
With strong growth in the electric vehicle (EV) segment, global lithium demand is likely to more than double by FY2024. Given this outlook, LAC stock is among the stocks to buy in the metal and mining sector.
The stock has already surged by 264% in one year. However, the biggest part of the rally is still to come. Once production commences, LAC stock is likely to be significantly higher as compared to current levels.
In the recent past, Lithium Americas has been on a fundraising spree. As of March 2021, the company reported $514 million in cash and equivalents. A strong liquidity buffer will ensure that the company’s construction activity for two key projects is on track.
Caucharí-Olaroz lithium project is likely to commence production in FY2022. Further, construction in the Thacker Pass lithium project will commence early next year. It’s worth noting that the Thacker Pass project is the largest known lithium project in the United States. Once this project is operational, the company’s revenue and cash flow will see strong growth.
Even for the Caucharí-Olaroz lithium project, the company expects an annual EBITDA of $308 million. This is at an estimated lithium price of $12,000 per tonne. Therefore, at a market capitalization of $1.7 billion, the stock still seems attractive.
Hecla Mining (HL)
HL stock is also worth considering among metal and mining stocks. The company is the largest primary silver producer in the United States. In addition, the company also has gold assets.
In general, gold and silver have a high positive correlation. Therefore, if gold trends higher, it’s very likely that silver will follow. Hecla Mining gives investors exposure to both precious metals.
For Q1 2021, the company reported sales growth of 54% to $210.9 million. In addition, the company reported adjusted EBITDA of $86.1 million. An important point to note is that for the quarter, the company’s AISC for silver was $7.21. With silver trading at $27.70, it’s likely that EBITDA margin will remain robust.
From a financial perspective, the company has available liquidity of $389.8 million as of Q1 2021. Further, the company’s leverage has declined to 1.4 for the quarter. With strong financial flexibility, the company is positioned for sustained growth. The company has also guided for continued silver production growth in the next few years in United States.
Further, with positive free cash flow from all the three operating mines, higher dividends are likely. Overall, HL mining has some quality assets that are likely to deliver sustained value.
Metals and Mining Stocks to Buy: Southern Copper (SCCO)
For exposure to copper, SCCO stock is another quality metal and mining name. The company has 67mmt of copper reserves, which is higher than Freeport. As of FY2019, the company also had a mine life of 68 years, which is likely to ensure stable cash flows in the long term.
For Q1 2021, the company reported sales of $2.5 billion and an adjusted EBITDA of $1.6 billion. With higher copper price, EBITDA margin is likely to remain strong. For FY2021, the company has guided for revenue of $9.8 billion with an EBITDA margin of 60%.
Over the next few years, Southern Copper has plans for annual capital expenditure of over $2 billion. This is likely to ensure steady production growth. The company’s debt-to-EBITDA as of FY2020 was 1.7. Therefore, there is ample financial flexibility to pursue aggressive investments.
It’s also worth noting that SCCO stock has an annual dividend of $2.80 and a current dividend yield of 4.16%. Given the outlook for copper prices and production visibility, the company is well positioned to sustain dividends.
SCCO stock also trades at a forward P/E of 21.5. The stock has trended higher by 91% in one-year, but there seems to be more room for upside considering the valuations.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
