Mining stocks make good bets ahead of economic recoveries.
Mining stocks are down but not out. The S&P/TSX Global Mining Index has fallen more than 11% this year as of Oct. 28, which is a better showing than the broader market as measured by the S&P 500. Mining company shares have gotten hit by the same inflationary pressures and recession worries as other industries, but the blow has been cushioned because the commodities they produce are inflation hedges. On the other hand, a stronger U.S. dollar has been a headwind to dollar-denominated commodities. Despite the mixed short-term outlook, the long view seems to be bright for most mined commodities as the transition away from fossil fuels spurs investments into renewable energy projects which need metals such as copper. Investors looking to dig into mining stocks may want to consider these seven names, many of which trade below where they were to begin 2022.
BHP Group Ltd. (ticker: BHP)
BHP Group is the largest miner in the world by stock market value. The company is a major producer of copper, iron ore and the type of coal used for steelmaking. It has a long track record of success, and its dividend yield is 13.7%, making it attractive even as U.S. Treasury rates rise. BHP’s shares are down more than 11.7% year to date as of Oct. 28 and have had a volatile ride this year, as is common with commodities stocks that are closely tied to economic performance and expectations. But shares may not remain suppressed for long. The average price expectation among two analysts offering 12-month price targets is $58, representing a 22% gain from where the stock closed on Oct. 28, according to investing research website TipRanks.
Rio Tinto Group (RIO)
This aluminum, copper and iron ore producer is the second-largest mining company in the world and is a similar base metals play to BHP. Rio’s shares are also yielding nearly 13%, but its stock has suffered more this year than BHP’s, falling 21.1% as of Oct. 28. It also appears to have more upside potential. The average price expectation among three analysts offering 12-month price targets is $68.83, representing a 30.3% gain from where the stock closed on Oct. 28, according to TipRanks. “Mining stocks, generally speaking, have struggled in this year’s market environment of rising interest rates and a skyrocketing U.S. dollar,” says Uranium Insider publisher Justin Huhn.
Newmont Corp. (NEM)
As inflation makes the cost of doing business higher for everyone, energy-intensive mining operations are particularly vulnerable. “Mining companies are seeing increased capital expenditures for development and production due to soaring inflation and gasoline/diesel prices,” Huhn says. Among those is Newmont, the biggest gold miner in the world by market cap and ounces produced. In July, Newmont raised its cost guidance to include “the impact from lower production volumes and higher direct operating costs related to labor, energy, consumables and supplies as a result of sustained inflationary pressures.” With gold on the backfoot because of rising interest rates that make U.S. government debt more attractive, Newmont’s shares have also been declining, potentially presenting a buying opportunity.
Freeport-McMoRan Inc. (FCX)
When the Federal Reserve thinks inflation is under control, it will stop raising interest rates, which has implications for gold and other commodities. “Inevitably, we’ll see a slowing in the pace of rate hikes and perhaps eventually even walking back interest rates, which will allow the U.S. dollar to fall, which should be an enormous tail wind for mining stocks and commodities,” Huhn says. That would be a boon for Freeport, one of the largest copper miners in the world and a major gold miner. If inflationary pressures are sustained for a long time, gold prices may rise. The precious metal tends to do well in times of inflation because it is priced in U.S. dollars. When the greenback loses value, that makes gold cheaper for those using other currencies, potentially boosting demand.
Cameco Corp. (CCJ)
Uranium is a metal that will be crucial to the energy transition away from fossil fuels. “The world’s growing desire for non-carbon-emitting green energy is driving a nuclear power renaissance,” Huhn says. “Uranium is already in a large structural supply deficit based on annual consumption relative to production, and there are simply not enough mines that can come online over the balance of the decade to fill the supply gap.” As one of the biggest uranium producers in the world, Cameco is well positioned to take advantage of this, especially as the war in Ukraine heightens Europe’s need for energy independence from Russia, a major uranium supplier. Cameco this month announced it and a group of other investors would buy Westinghouse Electric Co., a top nuclear services company in that market. Cameco’s stock is the only one on this list that’s up this year as of Oct. 28, but it has pulled back over the last six months.
Energy Fuels Inc. (UUUU)
Of the broad range of minerals that mining companies extract from the earth’s crust, Huhn says uranium is the metal that offers the best risk-reward profile over the next year. A risk to uranium stocks is that a nuclear accident would dampen demand for the radioactive metal, but Huhn considers this a remote possibility. Investors who want to go nuclear can spread out company risk among volatile uranium investments with exchange-traded funds, or ETFs, such as the Sprott Uranium Miners ETF (URNM). For those who want to pick individual stocks, another uranium mining company besides Cameco is Energy Fuels Inc., which is the fourth-largest holding in URNM. It costs less per share than Cameco, and its shares are down about 4% so far this year through Oct. 28. “Intelligent exposure to uranium mining companies offers attractive upside potential for investors,” Huhn says.
Livent Corp. (LTHM)
Lithium is another metal crucial to the energy transition. Prices have been rising sharply because of short-term factors boosting input prices and the long-term outlook for growth in the global electric vehicle market. The metal is crucial not only for batteries for electric vehicles but also for the batteries in utility-scale renewable energy projects. Lithium is also used in batteries for personal electronics. With the strong demand outlook, Livent’s plans include a 10,000-metric-ton expansion of lithium carbonate production in Argentina by the first quarter of next year and an additional 10,000 metric tons in the country by the end of next year.
7 best mining stocks to buy for 2022:
— BHP Group Ltd. (BHP)
— Rio Tinto Group (RIO)
— Newmont Corp. (NEM)
— Freeport-McMoRan Inc. (FCX)
— Cameco Corp. (CCJ)
— Energy Fuels Inc. (UUUU)
— Livent Corp. (LTHM)
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Update 10/31/22: This story was published at an earlier date and has been updated with new information.