Metals and mining stocks have been trending higher in recent quarters. And this rise was synchronized with a general rally for commodities.
The rally is evident from the fact that the CRB commodity index jumped 56.5% in the past 12 months. However, I think there are more advantages for the raw materials.
First and foremost, commodities are one of the most undervalued asset classes. To put it in perspective, over the past 20 years, commodities are the only asset class that has generated negative returns. Even over the past five years, commodities have provided an annual return of just 1.4%. It looks very likely that the current rally in commodities will hold up as investors turn to undervalued asset classes.
In addition, the Federal Reserve is expected to keep interest rates low until 2023. Even beyond that, interest rates will rise in small steps. Expansionary monetary policies are positive for metallurgical and mining stocks.
Considering these factors, I own a few stocks in the commodities segment. So let’s talk about the four stocks of metals and mines to consider.
- Freeport-McMoRan (NYSE:FCX)
- Newmont Company (NYSE:NEM)
- Rio tinto (NYSE:RIO)
- Southern copper (NYSE:SCCO)
Now, let’s dive in and take a closer look at each one.
Best metals and mining stocks to buy: Freeport-McMoRan (FCX)
Even after rallying 245% in the past 12 months, FCX stock is among the more attractive metals and mining stocks. The stock still trades at a forward price / earnings (P / E) ratio of 14.2. Additionally, with copper likely to experience a multi-year rally, FCX stock is worth considering.
For the first quarter of 2021, Freeport reported operating cash flow of $ 1.1 billion. This would imply an annualized cash flow of $ 4.4 billion. Healthy cash flow will allow the business to get out of debt. At the same time, dividends are expected to increase in the coming years. In fact, the company’s net debt declined to $ 5.2 billion in the first quarter of 2021, from $ 8.5 billion in the first quarter of 2020.
In terms of growth, Freeport has announced copper production of 3.2 billion pounds in 2020. Production is expected to increase to 3.85 billion pounds in the current year. And again at 4.4 billion pounds in 2022. Clearly, the company is positioned to benefit from higher production coupled with higher price realization.
Freeport also expects gold sales to double from 0.9 million OZS in 2020 to 1.8 million OZS by 2023. Given the decline in net debt, the company has great financial flexibility to increase its capital expenditures over the next few years. Overall, FCX stock remains attractive and a further rally is likely after some consolidation.
Newmont Corporation (NEM)
Among metals and mining stocks, I am also bullish on gold as an investment theme. The Federal Reserve is expected to pursue expansionary monetary policies until 2023. Even beyond this period, interest rates are expected to rise in small steps. It seems very likely that gold will have an uptrend over the next few quarters as high inflation persists.
NEM stock is among the best bets among gold mining stocks. The company has quality assets and a solid financial profile. Additionally, the stock has gone from a high of $ 74.75 to a current level of $ 62.60. I see this correction as a good opportunity for accumulation.
From a business standpoint, the company has 94 Moz of gold reserves and 101 Moz of gold resources. The current pipeline of assets is likely to ensure stable production is maintained until 2040. This is the main reason for optimism on the stock.
Additionally, for the current year, the company has forecast an overall sustaining cost of $ 970 per ounce. By 2025, the company plans to reduce the AISC to $ 800 to $ 900 per ounce. Even though gold is trading at close to $ 2,000 an ounce, Newmont Mining is well positioned to generate strong free cash flow.
Therefore, I expect dividends to hold. In addition, Newmont will likely have sufficient financial leeway to increase its asset base. Hence, NEM stock is another top choice among metals and mining stocks.
Best metals and mining stocks to buy: Rio Tinto (RIO)
The RIO title has been in a consolidation zone for the past six months. Given the bullish outlook for the metals and mining sector, a bullish breakout looks imminent.
It’s also worth noting that the RIO share is trading at a forward P / E of 6.4. In addition, the company pays an annual dividend of $ 4.64, which implies a dividend yield of 5.46%. Therefore, the stock is attractive to income investors with a strong financial profile.
For 2020, Rio Tinto reported free cash flow of $ 9.4 billion. Robust cash flow provides sufficient financial flexibility to support dividends. At the same time, the company can pursue growth projects.
It also appears that Rio Tonto is looking to diversify. Recently, the company signed a memorandum of understanding with InoBat. The latter is a European battery technology and manufacturing company. The partnership “will cover the full life cycle of commodities, from mining to recycling lithium”. As demand for lithium increases with the global adoption of electric vehicles, Rio Tinto appears to be making the right choices.
In addition, Rio has also partnered with Comptech. The partnership aims to bring a new generation of aluminum alloys for electric vehicles and 5G antennas. Of course, the production and sales of iron ore remains the cash cow of the company. In addition, the company is also in the extraction of copper and aluminum.
Overall, RIO stock is attractive to income investors. Moreover, given the valuations, the title seems positioned for a further rise.
Southern Copper (SCCO)
Goldman Sachs believes copper is a new petroleum. In fact, Goldman estimates that the price of copper will rise to $ 15,000 per tonne by 2025. Given these prospects, it makes sense to talk about another copper-focused company.
SCCO stock is currently trading at an attractive futures P / E of 20.3. The stock also offers an annualized dividend of $ 2.80. Given the outlook for copper prices, it is likely that dividends will continue to rise over the next several years.
It should also be noted that Southern Copper reported reserves of 67.7 Mt. In 2019, the company’s mine life was 68 years. With the expansion of assets, the company predicts a 50 year mine life in 2028. Clearly, the company is positioned for strong cash flow if the copper bull run continues.
For the current year, Southern Copper expects free cash flow of $ 2.2 billion. With a net debt to guided EBITDA ratio of 0.4, the company has a strong financial profile.
In addition, the company has one of the lowest cash costs in the industry. Even though the copper is lateral, Southern Copper is positioned to generate a robust FCF in the years to come.
Considering these factors, SCCO stock is attractive. Over the past six months, SCCO’s stock has fluctuated. The next stage of the rally looks imminent given the outlook for the metals and mining sector.
At the date of publication, Faisal Humayun had (directly or indirectly) no position in any of the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com publishing guidelines.
Faisal Humayun is a senior research analyst with 12 years of experience in credit research, equity research and financial modeling. Faisal is the author of over 1,500 stock-specific articles focusing on the technology, energy and commodities industry.