Investing in mining stocks can help individuals make money when global demand for raw materials grows. This guide will explain what mining shares are, the advantages and disadvantages of owning them, and several of the top UK companies in the industry.
What are mining stocks?
Mining stocks are businesses that look for and then pull raw materials from the ground. They can concentrate on all stages of a project’s life cycle, from exploration and mine development to producing the commodities. Or they can concentrate on one part of the process (such as junior miners that may focus solely on finding mineral deposits).
Additionally, mining shares can concentrate on producing just one type of commodity (like gold stocks). Or they can focus on digging for a variety of resources. The table below gives a broad explanation of the different types of mining categories and key materials within each one.
|Mining category||Examples of key commodities|
|Precious metals||Gold, silver, platinum, palladium|
|Base metals||Copper, aluminium, lead, nickel|
|Minor metals||Lithium, magnesium, tungsten, cadmium|
|Energy materials||Coal, uranium|
|Construction materials||Iron ore, sandstone, granite, slate|
|Fertilising materials||Potash, boron, phosphate|
Investing in mining stocks is one way individuals can try to profit when the global economy is expanding. Demand for raw materials largely rises when spending on goods (from houses and food to consumer electronics and cars) improves.
Certain mining shares can also be popular investments when economic conditions deteriorate. For example, gold prices tend to rise when the global economy suffers a shock and inflation rises. In this environment the profits (and share prices) of gold mining shares can move higher.
Mining shares can also allow a person to make money from particular market sectors or industries.
For example, you might buy electric vehicle stock Tesla to profit from rising demand for low-polluting vehicles. Or you could buy a lithium-producing stock (like US-focused Bradda Head Lithium) that supplies the key commodity needed to produce car batteries.
Top mining stocks in the UK
Let’s look at three of the biggest mining shares in the UK today. Each of these companies trades on the FTSE 100 index.
|Rio Tinto (LSE: RIO)||London, UK||A global, diversified commodities producer|
|Antofagasta (LSE: ANTO)||London, UK||A dedicated copper miner with assets in Chile|
|Glencore (LSE: GLEN)||Zaar, Switzerland||A producer, dealer, and recycler of raw materials|
Rio Tinto is a diversified mining business with operations that span the globe. Its assets range from Oyu Tolgoi — one of the planet’s largest copper deposits located in Mongolia — to more than a dozen iron ore mines in Western Australia and aluminium smelters in Canada.
Rio Tinto owns many of its assets outright, while in others it shares ownership with other miners or governments. The mining company, for example, holds a 30% stake in Escondida, the world’s biggest copper mine. BHP Group owns a controlling 57.5% stake and is operator of the Chilean asset.
Rio Tinto is a giant in the metals mining business, but it produces other raw materials too. These include diamonds, salt, and boron. The company’s wide asset base and exposure to multiple commodities gives it extra strength. Group profits can hold up even if particular mining assets are underperforming or certain commodity prices are weak.
Its broad wingspan also gives Rio Tinto a way to capitalise on multiple fast-growing end markets. Demand for its copper, aluminium, and lithium for instance might surge as electric vehicle sales take off. Meanwhile consumption of its iron ore — a critical ingredient in steelmaking — looks likely to rise as urbanisation rates in emerging markets increase.
Antofagasta concentrates solely on producing copper from the red-metal-rich soil of Chile. Its assets are located in the north of the country and its showcase asset is the Los Pelambres mine, one of the largest copper deposits in the world. It owns 60% of the project.
Antofagasta’s core operations are centred around copper production, though it also operates the Ferrocarril de Antofagasta a Bolivia (FCAB) division. This supplies rail and truck transport services to miners in Chile’s Antofagasta region.
Anntofagasta is three-quarters through an expansion project at Los Pelambres aimed to boost output from 2023. The plans will raise Antofagasta’s annual group production by 60,000 tonnes for the first 15 years of life and increase throughput at the plant to 190,000 tonnes each year from 175,000 tonnes now.
Bringing mines online and expanding existing assets can be a difficult and costly business. And Antofagasta recently lifted its costs for the development of Los Pelambres again, to $2.2bn from $1.7bn previously. This is because of disruption related to Covid-19 and general inflationary pressures.
Like Rio Tinto, Glencore also owns a large collection of mining assets that cover the globe. The firm produces a range of industrial metals like copper, lead, zinc, nickel, and cobalt. It also produces and exports coal.
Glencore isn’t just about digging for physical commodities though. It is also a major marketer of raw materials and plays a vital role in securing them from its global supplier base, then storing and transporting them to the customer.
Glencore sold 3.1m tonnes of copper in 2021, for example. This was equivalent to 12% of total global copper consumption last year (based on International Copper Study Group data). In total the business makes around 20% of adjusted earnings from its marketing activities.
Glencore also operates a recycling business where it gives copper and precious metals a new lease on life. This FTSE 100 company has many layers of diversification, then, by operating across various industries, commodities and regions.
Are mining stocks right for you?
Investing in mining stocks is an alternative to buying a physical commodity itself (like gold coins) or a financial instrument that tracks raw material prices (such as the United States Copper Index Fund).
Mining stocks are a well-liked asset class with individuals who believe a new ‘commodities supercycle’ is under way. Consumption of many raw materials is tipped to soar over the next decade as industries like renewable energy, electric vehicles, and consumer electronics grow strongly, and spending on housing and infrastructure goes through the roof.
Mining stocks are (largely speaking) highly sensitive to wider economic conditions. This means that profits can rise sharply when demand picks up. But conversely these types of equities can sink in value when times get tough, commodities consumption falls, and their profits take a hit.
Investing in a mining stock doesn’t always pay off when the economy grows, however. While demand for certain raw materials might increase, so too might market supply. This can have a significant impact on the prices that mining shares can ask for their product.
The performance of mining stocks can disappoint even if commodity prices increase sharply. Production stoppages can be common in the industry and revenues might suffer significantly as a result. Rising costs are another problem of investing in mining stocks as labour and energy-related expenses can rocket.
Investors have a choice between investing in ‘junior’ or ‘major’ mining companies. As the name suggests, junior mining stock are smaller and tend to have less financial clout than the larger players. This often makes them riskier investments, particularly during economic downturns when revenues can dry up.
The beauty of mining shares is that they can rise in value when commodity prices increase and pay a dividend to their investors. Not all mining companies return cash in this sort of way — mining for raw materials is an exceptionally capital-intensive business — but many UK-listed mining stocks do offer dividends.