Mining stocks can offer a hedge on inflation.
Gold prices recently hit $2,000 per ounce for the first time. Investors not only see gold as a safe-haven investment during times of economic uncertainty but also as a hedge against long-term inflation. The Federal Reserve has spent trillions of dollars propping up the U.S. economy in 2020, and inflation fears have driven up gold and other commodity prices as a result. Bank of America recently raised its 18-month gold price target to $3,000 an ounce and its silver target to $50 an ounce. Here are seven top mining stocks to buy on the inflation trade.
Wheaton Precious Metals Corp. (ticker: WPM)
Wheaton Precious Metals is a Canadian precious metals streaming company that generates about 55% of its revenue from gold, 41% from silver and the rest from palladium. Bank of America analyst Michael Jalonen recently named Wheaton his top overall stock pick in precious metals. Jalonen is bullish on the company’s robust free cash flow and high exposure to silver. He is projecting that Wheaton’s gold equivalent ounce output will expand from 680,000 in 2020 to 814,000 by 2023. Bank of America has a “buy” rating and $64.50 price target for WPM stock.
Newmont Corp. (NEM)
Newmont is the world’s largest gold producer. Jalonen says Newmont is his top senior gold producer stock pick. He says the company has tremendous long-term production visibility and predicts that Newmont will produce between 6 million and 6.5 million ounces annually over the next decade. Jalonen also projects at least $4.5 billion in free cash flow for Newmont in 2020, based on his updated gold price forecasts. That cash flow should allow the company to further develop its properties and even scout acquisitions. Bank of America has a “buy” rating and $86 price target for NEM stock.
Pan American Silver Corp. (PAAS)
Pan American Silver is one of the largest silver-focused miners in the world, producing 25.9 million ounces of silver in 2019. Analyst Lawson Winder says Pan American’s 85% revenue exposure to silver and gold, along with its solid balance sheet, its diversified portfolio, and its focus on capital returns, make it a top play in the silver space. In addition to the inflation trade, there is a much higher demand for industrial silver than gold, making Pan American a potential economic recovery trade as well. Bank of America has a “buy” rating and $53 price target for PAAS stock.
Southern Copper Corp. (SCCO)
Southern Copper is one of the largest global copper producers. The company sold 986,000 tons of copper in 2019 and is targeting 1.5 million tons by 2028. Analyst Timna Tanners says copper prices likely have significant upside, and Southern is one of the few public copper pure plays. Tanners is bullish on the company’s 3.5% dividend, its steady growth pipeline and its cost advantages relative to peers. Southern has long-term catalysts as well, given that its largest growth projects have been delayed until 2023 and beyond. Bank of America has a “buy” rating and $49 price target for SCCO.
Vale SA (VALE)
Vale is the world’s largest producer of iron ore, iron pellets and nickel. Tanners says Chinese government stimulus can help support higher iron ore prices in the second half of 2020. She says Vale’s strong free cash flow profile should support share buybacks and the resumption of dividends, which were suspended in January 2019 following a deadly dam accident. Management recently said it hit its near-term target for net debt, suggesting a potential extra dividend could be announced in September. Bank of America has a “buy” rating and $15 price target for VALE stock.
Freeport-McMoRan is the world’s largest public copper and molybdenum producer and one of the largest global gold producers. Tanners says Freeport is on track to generate positive free cash flow ($466 million) in the second half of 2020 for the first time since the third quarter of 2018. Management’s focus on its lowest-cost operations, coupled with rising copper prices, should reduce leverage and open the door to resume dividends and buybacks in the first quarter of 2021, according to Tanners. Bank of America has a “buy” rating and $17 price target for FCX stock.
Albemarle Corp. (ALB)
Albemarle is one of the largest and lowest-cost lithium producers in the world. The electrification of the global auto fleet will ultimately create a surge in lithium demand, but it may require some patience. Lithium prices are still deflating from peak 2017 levels, and Albemarle shares are down about 20% in the last three years overall. While a lithium boom is coming at some point, analyst Steve Byrne says it’s still too early to be buying Albemarle, given that the lithium market is adequately supplied through at least 2021. Bank of America has an “underperform” rating and $58 target.
Mining stocks to buy as an inflation hedge:
— Wheaton Precious Metals Corp. (WPM)
— Newmont Corp. (NEM)
— Pan American Silver Corp. (PAAS)
— Southern Copper Corp. (SCCO)
— Vale SA (VALE)
— Freeport-McMoRan (FCX)
— Albemarle Corp. (ALB)
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