Why And How to Buy Mining Stocks Instead of Pricey Commodities?

Gemstone in stock. Mining is lucrative.
  • Mining stocks appear more lucrative than the commodities themselves.

  • They pay dividends and bear no expenses.

  • But in practice, most miner companies have a mixed portfolio.

  • It is impossible to find pure-play stocks for various commodities.

  • A leverage effect makes the investments riskier–and more exiting.

Silver melting, industry demand


Why Should You Buy Mining Stocks?

We have seen a strong bull run in the commodity markets in the last 18 months, and many products are on levels not seen for many years. Then, there was a correction from May to August, but ultimately, the bulls seemed to gain power again.

1. The Commodity Bull May Persist

The inflation doesn’t appear transitory, as Fed officials told us before. Instead, it turns to be higher and longer-lasting than many expected. Money printing may slow down globally, but the real tightening–the reduction of the amount of money in the economy–is far away. The economic recovery is slower than foreseen, but the following year may bring more growth and commodity demand.

The Nasdaq Commodity Metals Index
The Nasdaq Commodity Metals Index (Tradingview.com)

On the supply side, in many commodity branches, investments are lagging. Because in the last 5-8 years, many miners didn’t want to spend money in new mines or production sites because the return expectations were uncertain. Therefore, a supply crisis can be the next big problem in the economies–and because of that, the high commodity prices.

2. Holding Commodities Is Expensive

Storage of physical commodities has different expenditures by all materials. Contango is also a problem, which makes the longer-term holding of some commodities very expensive. (Contango means the longer-term settlements are higher than the front-month futures. As a result, you can rollover your position only at a higher price, losing money every month. See more in this post about crude oil.)

3. Owning Mining Stocks Is Lucrative

Mining companies, on the other hand, if they manage it well, make a profit and usually pay dividends from it. Imagine you have a monthly loss of 1-3 percent on a commodity and 2-5 percent gain a year on a mining stock. There is no doubt which one is worth choosing in the long run. But there are exceptions, like oil companies in the last five years. (Look at the chart.)

Brent crude oil, XOP, and FILL energy producer ETFs
Brent crude oil, XOP, and FILL energy producer ETFs (Tradingview.com)

How to Buy Mining Stocks, Then?

There are two essential methods, and both are worth investigating, ETFs or stocks. But some investors may not even choose because they can’t buy adequate US funds, ETFs. Only the individual shares. (Like citizens of the European Union.)

Method 1: Buy Mining Stock ETFs

In many branches of the commodity space, ETFs (exchange-traded funds) specialized on miners. We can identify the ETFs with a single ticker code. For example (the list is far from being complete):

  • Mixed mining holdings: PICK (iShares MSCI Global Metals & Mining Producers ETF).
  • American crude oil and natural gas companies: XOP (SPDR S&P Oil & Gas Exploration & Production ETF).
  • Global oil and gas: FILL (iShares MSCI Global Energy Producers ETF).
  • Copper: COPX (Global X Copper Miners ETF).
  • Gold: GDX (VanEck Gold Miners ETF) or GDXJ.
  • Silver: SIL (Global X Silver Miners ETF) or SILJ (ETFMG Prime Junior Silver Miners ETF).
  • Uranium: URA (Global X Uranium ETF) or URNM (North Shore Global Uranium Mining ETF).
  • Timber: WOOD (iShares Global Timber & Forestry ETF) or CUT (Invesco MSCI Global Timber ETF).
  • Rare earth: REMX (VanEck Rare Earth/Strategic Metals ETF).
  • Lithium: LIT (Global X Lithium & Battery Tech ETF) or SOLLIT (Solactive Global Lithium Index ETF).
  • (Etc.)

(ETF databases for the US: Etf.com or Etfdb.com. The European Union: Justetf.com.)

Method 2: Buy Individual Mining Shares

But you won’t find mining stock ETFs in other branches. I haven’t discovered any of them, for example, for most soft commodities and agricultural products. Nor some metals like platinum, palladium, rhodium. In these cases, or if you can’t reach the suitable ETF in your country (but you can purchase international stocks), you should buy individual shares.

Giant mining equipment
Giant mining equipment

The question is, which ones. Some commodities have no clean, “pure-play” producer at all. For example, palladium, platinum, and rhodium (members of the PGM, platinum group metals) are products of the same mines. These metals are found together underground, mined together. Thus, mining companies are exposed to the exchange rate risk of several metals at the same time. Or, from a positive viewpoint, they can benefit from price increases of several metals.

Many companies also bring gold and silver to the surface at the same time. Some very complex, giant holding companies deal with almost all mineral resources on all continents.

Copper price (HG), Freeport-McMoRan, Southern Copper
Copper price (HG), Freeport-McMoRan, Southern Copper (Tradingview.com)

Examples of Exposure of Mining Stocks

How to Enter The Copper Business?

Let’s suppose we seek copper exposure. On many lists, one of the world’s biggest copper miners is BHP Group. But in its annual report 2020, we find that the proportion of copper in its EBITDA had only a 19 percent weight. (With iron ore 64 and petroleum 10 percent.)

  • Southern Copper isn’t “pure-play” either, but a high percentage, 84% of its revenues, came from copper in 2020. Other sources were molybdenum, zinc, silver. Worth mentioning that Southern Copper claims to have the world’s largest copper reserves. But also, that it has strong Peruvian activities that may cause underperformance for political reasons. (Read: Are Peruvian Stocks A Buy?)
  • Freeport McMoRan also produces molybdenum and gold, but the company’s slogan says “foremost in copper.” Indeed, its revenue share in Q1 2021 was 78 percent (gold had 11, molybdenum 6 percent).
Platinum (PL), palladium (PA), Impala Platinum (IMPUY), Sibanye Stillwater (SBSW)
Platinum (PL), palladium (PA), Impala Platinum (IMPUY), Sibanye Stillwater (SBSW) (Tradingview.com)

 Platinum, Palladium, Rhodium Miners

As mentioned above, there is no such thing as platinum, rhodium, palladium miners, only PGMs (platinum group metals).

  • Anglo American is considered as the biggest PGM-miner, but this segment is only a small part inside of its giant holding structure. By data of 2018:

Anglo American revenue breakdown by business segment: 11.0% from Iron ore, 20.1% from Diamonds, 13.0% from metallurgical coal, 16.3% from copper, 7.4% from platinum, 5.7% from palladium, 12.8% from thermal coal, and 13.7% from Other. (Source)

Two almost-pure PGM-miners are Impala Platinum and Sibanye Stillwater in South Africa.

Gold (GC), Newmont Corp. (NEM), Barrick Gold (GOLD), GDX ETF
Gold (GC), Newmont Corp. (NEM), Barrick Gold (GOLD), GDX ETF (Tradingview.com)

 High-Grade Gold Miners

There are some classic gold mines, but other companies have a mixed-income. Sales of Newmont Corporation contain gold incomes in 90 percent. The other industry leader Barrick Gold also mines copper, although its share is moderate.

Copper is expected to represent at least 20 percent of our gold-equivalent ounces sold from 2021 to 2025, up from the 16 percent contribution in 2020. (Source)

Silver Does Not Come Alone

The big holdings of the SIL ETF (containing silver miners) make only a part of their revenues of silver. Perhaps some small companies were more silver-heavy.

  • Polymetal International had 86 percent of its revenues from gold in 2020.
  • Pan American Silver’s name isn’t expressing exactly the profile of the company because silver was only providing 27 percent of its income (in Q2 2021). Gold gave 58 percent, zinc 8 percent.
  • By Wheaton Precious Metals, silver added approximately 35 percent of the revenues.
  • Hecla Mining also extracts a lot of gold, also some lead and zinc. Silver’s share was only approximately 45 percent here in 2020. (By our calculations.)
  • post mentioned First Majestic Silver as more pure-play silver miner stocks. Although it also produces a lot of gold, silver’s share was about 57 percent last time. (Own calculation based on the last annual report).
  • Endeavour Silver was similar, with 56 percent of silver and 44 percent gold in Q1.
Strange: The Gold Mining Stocks (GDX) are following silver (SI) better than silver miners (SIL).
Strange: The Gold Mining Stocks (GDX) are following silver (SI) better than silver miners (SIL). (Tradingview.com)

Attention: Leverage And Hedging in Play

Mining stocks function mostly as a leveraged position on commodities. That means, if the underlying commodity surges one percent, the stock may jump 2-3 percent. On the contrary, if commodities fall, miners’ shares may fall double or triple. (And some of them may end in bankruptcy.) For example, if you wanted to buy precious metals for $10,000, you may consider only an investment of $3,000-5,000 in mining stocks. Commodity stocks are risky and volatile, even compared with the commodities themselves.

Coal mine. The dark sides.
Coal mine. The dark sides.

Another question is, how should we measure the exposure of a company to a specific commodity. By revenues? By contributing to the earnings? Or to the EBITDA? The mentioned data above gives us only a raw picture of these exposures.

Some companies are also hedging their production or a part of it. (They sell the metals on the futures market, smoothing price fluctuations, lowering risks. But also limiting commodity price gains.) You should read about their hedging policy before making any investment.

Others also are storing strategic reserves, waiting for further price surges and supply scarcity.

Similar commodity topics:

Energy Stock ETF Investing–12 Reasons Why This Is a Dividend-Heaven

5 Cheap Commodities–Buy Low, Buy the Trend, Or Both?

A Sharp Correction After The Incredible Rhodium Price Explosion



I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.

I’m long in various miner stocks, cryptocurrencies and short in the VIX index at the time of writing.

(Photos:  Pixabay.com.)

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