You can say one thing about investing in mining stocks, it is rarely dull. 2014 and 2015 were nerve-wracking, 2016 and 2017 packed with fun.
If you look beyond that and invest for the long term, the buy case is strong. Most investors should have exposure to this sector and growth monster BHP Billiton (LSE: BLT) is a good place to start. The stock is up 146% over the past two years, driven by the sector’s spectacular recovery since the January 2016 China meltdown.
BHP gives you exposure to a broad range of natural resources, including iron ore, metallurgical coal and copper, and oil and gas as well. It responded to the traumas of 2015 by slashing capex and cutting overheads, leaving it nicely positioned for the cyclical upswing. So as the oil price nudges $70, it benefits. When the copper price climbs, again, up it goes. When prices fall, it hurts.
Metal prices have surged over the last year due to the weak dollar and recovering confidence in China, sending copper to a three-year high of $7,000 a metric ton, but they dipped yesterday amid signs of rising stockpiles. With the global economy growing and factory output rising, this may only be a blip.
Size matters in the commodity industry, allowing this vast £86bn group to withstand lower prices, maintain production and watch smaller rivals go to the wall. It generated free cash flow of $12.6bn in the year to 30 June, while reducing debt by 37% to $16bn. Yet it trades on a modest 13.9 times forecast earnings, with a price-to-earnings growth ratio of just 0.7. Current yield is 4.1%, covered 1.7 times. One to buy and hold as long as you possibly can. Here is another mining stock that could help you retire early.
All that glisters
Hochschild Mining (LSE: HOC) is a relative minnow with a market cap of just £1.24bn and is even more volatile. It is up an incredible 500% over two years, mostly due to a strong 2016. It is up only 5% over the past 12 months, with profits undermined by increased costs. Do not expect it to carry on four-bagging.
This morning’s production report for the year ended 31 December saw CEO Ignacio Bustamante reporting that it has “once again delivered a historic year of production with output growing for the fifth consecutive year”.
Total 2017 production was a record 513,598 gold equivalent ounces and 38m silver equivalent ounces, including 254,932 ounces of gold and 19.1m ounces of silver. Costs and capex for 2017 should meet expectations while the group’s financial position is “very robust“, as it completes early repayment of its bonds over the coming days. Bustamante also reported “encouraging results” across its brownfield exploration programme.
Its cash balance has also strengthened to hit $256m at 31 December, up from $140m one year earlier, net debt falling from $183m to $97m over the same period.
Hochschild’s share price is down 1.13% at time of writing. Given its forecast valuation of 38.2 times earnings, I can see why. RBC Capital recently downgraded the company due to its valuation, although it said the story remains “compelling“. Much depends on the progress of its exploration programme. However, forecast earnings per share growth of 69% in 2018 and 21% in 2019 point to a shinier future. Maybe wait for a cheaper entry point.
BHP Billiton would be my preferred stock, a big solid dividend payer that could help underpin a comfortable retirement and give you the financial independence you crave.
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Harvey Jones has no position in any of the shares mentioned. 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.