Better mining stock buy: Endeavour vs Rio Tinto

Today, the long-term investing case for two mining stocks is put forward by a couple of our Foolish contributors.

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With M&A activity emerging in recent days, there’s cause for investors to look afresh at the British-listed stocks operating in the mining sector.

So we asked two Fools to name their favourite shares in the sector right now, and why. As ever, note that returns are not guaranteed and past performance is not a reliable indicator of future results.

Endeavour Mining: focusing on what matters

By Stephen Wright: Mining is a commodity business. In other words, gold from one company is just the same as gold from another.

That means there’s pretty much no pricing power for mining companies. The price of gold is what it is (although it moves around) and businesses have to figure out how to operate at those prices.

So what makes one mining stock more desirable than another? The answer, in my view, comes down to the quality of their assets in terms of (i) how much they can extract and (ii) how much it costs.

Endeavour Mining (LSE:EDV) stands out to me as a really good mining stock. The company owns and operates gold mines located in Africa. 

It costs Endeavour between $880 and $930 to extract an ounce of gold from the ground. That’s much lower than Newmont ($1,215), Barrick ($1,269), and AngloGold Ashanti $1,300.

The price of gold at the moment is around $1,989 per ounce, which is quite high. That probably goes some way towards explaining why the stock is one of the best performers in the FTSE 100 lately.

Buying shares in a gold-mining business when gold is expensive is a risk. If the gold price falls, it could cut into the company’s profits. 

I’m not convinced there’s ever really a bad time to invest in a company with lower production costs than its competitors, though. That’s why Endeavour is my top mining stock to buy.

Stephen Wright does not own shares in AngloGold Ashanti, Barrick, Endeavour Mining, or Newmont.

Rio Tinto offers strength in depth

By Royston Wild. Investing in mining stocks could prove incredibly lucrative as the world embarks on the next commodities supercycle.

Themes like the widespread adoption of green technology, a consumer electronics boom, and rapid urbanisation in emerging markets means demand for a swathe of metals might well explode.

Yet investing in businesses that concentrate on a sole commodity can be risky. This is because profits depend on a favourable pricing environment for just one raw material. Copper producer Antofagasta and gold digger Endeavour Mining are examples of such companies.

Diversified miners allow investors to reduce risk by providing exposure to a variety of commodities markets. This is why I chose to add Rio Tinto (LSE:RIO) shares to my own portfolio last year.

This FTSE 100 operator is the third-largest mining company on the planet. It’s perhaps known as one of the biggest suppliers of iron ore. In fact, in 2022 it made almost 70% of underlying EBITDA from production of the steelmaking ingredient.

However, Rio Tinto also makes significant revenues from copper, aluminium, and a handful of other minerals like lithium and titanium dioxide. Its share price could still fall if demand for iron ore falls. But the firm’s broad operations leaves it less vulnerable to shocks in one or two of its markets.

Diversification is just one reason I bought Rio Tinto shares, though. I also opened a position because of its significant financial strength and its ability to invest for future growth.

Ongoing expansion of its iron ore operations in Western Australia is one example of how the business is splashing the cash to boost earnings. I plan to buy more shares in this mining industry giant if I have cash to spare.

Royston Wild owns shares in Rio Tinto.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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