Sector Screener: the FTSE 100 mining stocks with long-term appeal

Mining stocks face an uncertain near-term outlook that may dissuade some investors from buying them. Although interest rate cuts are on the short-term agenda for central banks across developed economies, the full impact of restrictive monetary policy may not yet have been fully felt due to the existence of time lags. And with a new era of rate reductions having only recently begun, it will take time to have a positive impact on the world economy and the mining sector.

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In addition, geopolitical risks are relatively high at present. The outcome of the US election remains too close to call, with the result likely to have a significant impact on relations between the world’s two largest economies. In turn, this may influence the world economy’s future growth rate and, therefore, affect levels of demand for a wide range of commodities. Elsewhere, ongoing geopolitical risks in the Middle East and Europe could also have a significant bearing on global GDP growth and shape investor sentiment towards cyclical mining stocks.

A margin of safety

An uncertain short-term outlook, though, appears to be priced into the market valuations of several mining companies. In many cases they include wide margins of safety that suggest investors have anticipated a lean period for incumbents caused by the economic and geopolitical risks. Indeed, the FTSE 350 Industrial Metals & Mining sector has risen by just 1.9% over the past year versus a 13% gain for the wider index.

Certainly, share price volatility among mining companies could continue to be relatively high in the coming months. But with many sector incumbents having sound fundamentals, including solid financial positions, the risk of a permanent loss of capital does not appear to be relatively high. Long-term investors who can overcome potentially wild swings in share prices over the short run should therefore not be dissuaded from buying shares in high-quality mining firms.

Source SharePad. Data as at 23 October 2024. Past performance is not a guide to future performance.

Source SharePad. Data as at 23 October 2024. Past performance is not a guide to future performance.

Growth catalysts

Low valuations within the mining sector, of course, provide scope for significant capital gains in the long run. The sector is set to benefit from several notable catalysts over the coming years, with interest rate cuts in the US likely to ultimately have a positive impact on global growth. Alongside the prospect of further stimulus in China, which is a major buyer of a wide range of commodities, this should equate to rising demand, higher earnings and share price growth for mining companies.

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Furthermore, mining firms are likely to be among the biggest beneficiaries of the world’s ongoing push towards net zero. While a period of restrictive monetary policy may have slowed this process as various projects have not made economic sense while borrowing costs have been high, lower rates should equate to rising demand for future-facing commodities such as copper, iron ore and lithium that are widely used in electric vehicles and renewable energy infrastructure.

Several mining companies have repositioned their portfolios over recent years so that they are squarely focused on the energy transition. With the supply of various commodities, notably copper, being highly restrained due to limited exploration success over recent decades, it is likely that a rise in demand as the world’s push for net zero continues, will prompt higher prices that boost the bottom lines of mining companies.

Managing risk

Clearly, several mining stocks lack diversity. In many cases, for example, they are focused on a small number of commodities and in some cases, they are pure-play operators that mine only one specific commodity. This means their performance is likely to be relatively volatile. Similarly, they may only have a presence in a small number of geographical locations that means they are open to greater geopolitical uncertainty.

Investors should, therefore, ensure that they hold a diverse range of mining firms in such instances to dilute their reliance on the prices of specific commodities. Alongside making sure that mining firms do not carry excessive levels of debt, this should help to reduce risk and provide a more favourable long-term investment opportunity.

Source SharePad. Data as at 23 October 2024. Past performance is not a guide to future performance.

Antofagasta

Chile-focused copper miner Antofagasta (LSE:ANTO)’s share price has risen by around 21% since the company was first featured in this column during July last year. This compares favourably with a 5% decline for the FTSE 350 Industrial Metals & Mining sector over the same period.

The FTSE 100 company’s latest update showed that it delivered a 15% rise in quarterly copper production. The firm is on track to meet production guidance for the full year, while costs have been in line with previous forecasts.

Although it expects year-on-year production to be relatively unchanged in 2025, the company should benefit from a rising copper price over the long run as evolving demand and supply dynamics work in its favour. The business is also set to benefit from ongoing investment in development projects, as well as productivity improvements that amounted to $130 million in the first half of its current financial year.

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The firm’s balance sheet remains sound ahead of what could prove to be a challenging period for the world economy. Its net debt-to-equity ratio of 36% is relatively modest, while net interest cover above 11 in the first half of its current year highlights that it is well placed to overcome a possible period of financial uncertainty.

While the company’s shares trade on a price/earnings (PE) ratio of around 31.9, which is relatively unappealing vis-à-vis the wider sector, Antofagasta’s bottom line is forecast to rise at an annualised rate of 23% over the next two financial years. This suggests that it continues to offer good value for money on a long-term view, with solid fundamentals, ongoing development opportunities and an improving outlook for the copper price equating to investment appeal.

Rio Tinto

Rio Tinto Registered Shares (LSE:RIO)’s share price performance has been far less impressive than that of Antofagasta since it also first featured in this column during July last year. The FTSE 100 company’s shares have fallen by around 3%, which is only slightly better than the wider sector’s performance over the same period. They now trade on a PE ratio of just 9.4, which suggests they offer a wide margin of safety and scope for significant capital gains over the long run.

The company is becoming increasingly well placed to capitalise on the global energy transition. It recently agreed to purchase Arcadium Lithium (NYSE:ALTM) for $6.7 billion, which will make it one of the biggest lithium producers in the world. This will complement its iron ore and copper operations, which are set to benefit from continued investment over the coming years, with the firm’s recently released operational review showing that production guidance for the full year is mostly unchanged versus previous expectations.

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With a net debt-to-equity ratio of just 9% and net interest cover of 75 in the first half of its current financial year, Rio Tinto has an excellent financial position. This should allow it to not only overcome possible near-term economic uncertainty, but also engage in further M&A activity and invest in its development projects.

Alongside an attractive market valuation, sound fundamentals and long-term growth potential, this means that the stock remains relatively attractive on a risk/reward basis. It appears to be well placed to generate sector and index-beating performance over the coming years.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.