Consider Investing in Diversified Mining Companies
Like the large integrated energy companies — ExxonMobil and BP — diversified mining companies are involved in all aspects of the metals production process. These companies, which often employ tens of thousands of people, have operations in all four corners of the globe. They’re involved in excavating metals — both precious and base metals, ferrous and nonferrous — as well as transforming these metals into finished products and subsequently distributing the end products to consumers.
Investing in one of these companies gives you exposure not only to a wide variety of metals, but also to the whole mining supply chain. Following are the “best of breeds,” and an evaluation of their investment suitability.
BHP Billiton is one of the largest mining companies in the world. It formed as a result of the 2001 merger between Broken Hill Proprietary, an Australian company, and Billiton, an Anglo-Dutch company. BHP Billiton, headquartered in Melbourne, Australia, has mining operations in more than 25 countries, including Australia, Canada, the United States, South Africa, and Papua New Guinea. The company processes a large number of metals, including aluminum, copper, silver, and iron; it also has small oil and natural gas operations in Algeria and Pakistan. The company is listed on the New York Stock Exchange (NYSE) under the symbol BHP.
BHP Billiton offers economies of scale, meaning large-scale exposure to various sectors of the supply chain, which enhances its pricing capabilities. This is a large company, by any standard. Here’s a snapshot of the company’s financial performance. (All figures are for 2015.)
Revenues: $96.5 billion
Net income: $9.7 billion
Free cash flow: $23.3 billion
Profit margins: 21.4 percent
The company has benefited handsomely from the increasing prices of commodities such as copper and aluminum. As a result, BHP Billiton has been operating on a historical profit margin in the neighborhood of 20 percent.
Remember that past results don’t guarantee future performance. Commodity prices are cyclical in nature, and prices for metals such as copper, silver, and aluminum can’t go up in a straight line forever. Make sure that you take into account the cyclicality factor as you move forward with your commodity investments. As evidence, consider the Global Financial Crisis of 2008 and the subsequent effect it had on global equities, including BHP.
Rio Tinto is a mining company rich in both minerals and history. The Rothschild banking family founded the company in 1873 to mine ore deposits in Spain. Today Rio Tinto boasts operations in Africa, Australia, Europe, the Pacific Rim, North America, Australia, and South America. A true mining conglomerate, it’s involved in all facets of the mining supply chain, from extraction to transformation and distribution.
The company is involved in the production of a number of commodities, including iron ore, copper, aluminum, and titanium. In addition, Rio Tinto has interests in diamonds, manufacturing almost 30 percent of global natural diamonds, processed primarily through its mining activities in Australia.
By investing in Rio Tinto, you get not only a company that has extensive operations across the mining complex, but also one that’s in a solid financial position. Check out some numbers the company posted in 2015:
Revenues: $54.6 billion
Net income: $4.5 billion
Free cash flow: $4.2 billion
Profit margins: 11.5 percent
These strong numbers, which reflect increased demand for the commodities the company is involved in, have had a positive mid- to long-term impact on the company’s stock. Rio Tinto trades on the NYSE under the ticker symbol RTP.
Anglo-American PLC began mining gold in South Africa in 1917. It was a venture by British and American entrepreneurs (hence the name) who saw an opportunity in developing South African mines. Ever since, it has played an important role in the development of South Africa’s gold-mining industry. Today Anglo-American has operations in all four corners of the globe and operates in more than 20 countries. It’s involved in producing and distributing a wide array of metals, minerals, and natural resources, including gold, silver, and platinum, but also diamonds and paper packaging (it owns 45 percent of DeBeers, the diamond company).
Anglo-American is more of a long-term investment because it has been in the business for almost a century, it’s involved in almost all aspects of the mining industry, and the scale of its operations is global. The company is listed in the London Stock Exchange under the ticker symbol AAL. In addition, it has American Depository Receipts listed in the NASDAQ National Market that trade under the symbol AAUK.
When a foreign company wants to access the American capital markets, it has the option of issuing its shares as American Depository Receipts (ADRs). A domestic bank (such as the Bank of New York, which is the largest issuer of ADRs) issues ADRs to the American investing public, while the bank holds shares of the foreign company overseas. The advantage of the ADR is that it allows American investors to invest in foreign companies without going through foreign exchanges. The ADRs trade in such a way that they reflect the daily price movements of the underlying stock as it is traded in a stock exchange overseas. For more information, you can check out the Bank of New York’s website on ADRs.