Mining stocks are risky, so why not keep life easy and stick with a commodity ETF?
ETFs offer simplicity and peace of mind.
To show you what I mean, here’s a rundown of the dilemmas faced by mining stocks:
There’s the weather; flooding rains can have a massive impact on production.
When mining haul roads become quagmires after flooding rains, machinery can’t operate, tracks become too slippery, and the risk of accidents rises.
Earlier this year, we saw the effect across northern parts of Western Australia with unseasonally high rainfall.
But that’s small fry compared to the geopolitical risk…
Miners gambling on developments in frontier locations face constant threats from political instability and rapidly changing mining laws.
And unlike other businesses, producers can’t pack up and shift operations to new areas.
Yet, even if a company is in a ‘tier-one’ location like Australia or Canada, it may face hefty permitting restrictions.
Environmental regulations are important; rogue miners are bad for the industry.
At times, though, permitting can become so restrictive that it makes projects unviable, which pushes mines into frontier locations where regulations don’t exist.
That’s a poor outcome for companies, shareholders, the local people, and the environment.
Then there’s the constant threat of operational delays and breakdowns…too many risks to list here.
But here’s one example… Western Australia contains extremely hard, silicified rocks that can present major challenges for milling and crushing machinery at mine sites.
Engineers are in a constant battle with the natural elements.
So, why would anyone invest in a miner?
Why not play it safe and stick with a commodity ETF?
Here’s why…
Commodity ETFs vs Mining Stocks
While individual mining stocks come with higher risk, the right companies can lead to outsized benefits.
Let’s use our old friend copper as an example…
Factoring in the recent correction, futures are still up a modest 15% over the last 12 months:
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| Source: TradingEconomics |
Now, compare that to some of the world’s largest ‘pure play’ copper producers…
Southern Copper [NYSE:SCCO] is still up 52% over the last 12 months despite metal prices easing.
Meanwhile, the Canadian-listed Ivanhoe Mines [TSX:IVN] is up more than 42%, while the London-based miner Antofagasta [LON:ANTO] is up around 39%.
Each copper producer has significant risk factors revolving around geopolitics, operational delays, and adverse weather events affecting production.
Yet each of them has eclipsed the performance of the underlying metal over the last 12 months.
Of course, there are no guarantees here, not all copper miners performed this well. These are high risk and speculative stocks.
You can’t avoid risk
It’s an obvious statement, but there’s no way to eliminate risk, especially in resource investing.
However, investors tend to view jurisdictional risk as the most important one to avoid.
But in my mind, that leads to a home-country bias and missed opportunities.
Take Ivanhoe Mines; the company holds one of the world’s highest-grade copper mines.
It’s a behemoth, spitting out around 390,000 tonnes of copper concentrates annually.
The company continues to meet guidance, has favourable operating margins, and has decades of growth ahead.
It also holds an enviable pipeline of growth and development projects, a rare feature among copper producers.
Yet shareholders would recognise one major pitfall…the company’s primary copper assets are in the infamous Democratic Republic of Congo in Central Africa.
Whatever Ivanhoe’s prominent CEO, Robert Friedland, might tell you, this is not a tier-one destination for miners! Far from it.
This central African nation has been plagued by war, violence, corruption, political instability and nationalisation of mining projects.
Yet, that hasn’t stopped the company’s share price surging in 2024!
I bet you didn’t expect that, did you?
So, why not play it safe and stick
with a home-grown producer?
In contrast, Australia has large-scale copper deposits tightly held by multinational firms like BHP.
Due to their size and diversified assets across many different commodities, investing in these companies offers limited upside to rising copper prices.
So, what options exist if you’re looking at pure-play copper producers closer to home?
Sandfire Resource [ASX:SFR], touted as the ‘new Oz Minerals’, has fared well, keeping up with the big players in the Northern Hemisphere.
It’s up an impressive 46% over the last 12 months.
But after that, it’s an extremely short list indeed!
Aeris Resources [ASX:AIS] has fallen more than 50% in the past year after withdrawing earnings guidance in 2023.
It’s made a noticeable recovery in the last three months, but it remains a far cry from where it was last April.
Copper-focused 29 Metals [ASX:29M] has experienced a similar fate, falling more than 50% over the last year.
Meanwhile, the small South Australian copper producer Hillgrove Resources [ASX:HGO] is only up by 13%, underperforming copper prices.
There’re a few other minor plays, but nothing worth mentioning here.
The key point… Options for pure copper producers in Australia are extremely limited.
Home bias could mean allocating your capital to sub-par projects, as seen from the examples I discussed.
For this reason, I consider home bias the greatest risk for a serious copper investor.
So, what’s the solution?
Consider some of the international names I’ve shown you above.
Absolutely, each one of these stocks has its own specific risks.
But when the copper surge comes, pure-play producers should beat any copper ETF… Hands down.
Are you game to take on the challenge for a chance to enjoy the potential benefits?
If you are interested, learn more about what I have on offer in my commodities investment newsletter, Diggers and Drillers.
Until next time,
Enjoy!
Regards,
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James Cooper,
Editor, Mining: Phase One and Diggers and Drillers
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