Should investors dig into mining stocks again?
There is no simple answer because mining has always been a cyclical industry and a risky play for investors, especially in recent years.
A quick review of the S&P/TSX Global Mining Index over the past decade reveals how during any market cycle, mining stocks can produce strong returns, but can also produce big losses. Mining stocks ran up in the years before the 2008 global financial crisis, collapsed, and then rose again in from 2009 to early 2011 as the global economy staged a comeback. China, whose share of world metal consumption surpassed 50 per cent in 20151, was largely to thank for the industry's resurgence in the aftermath of the global financial crisis.
However, as China's economic growth slowed in recent years, so too has demand for commodities. In January 2016, the index sank below $40, lower than the value during the depths of the financial crisis.
The index has since moved higher, trading around $67 as of the beginning of October 2017 (all current index and stock prices mentioned in this article are as of October 2, 2017) but remains volatile.
Of course, the mining sector is not one monolithic entity — it's made up of different kinds of companies with very different business models.
The prospects of industrial miners (think iron, copper, coal) generally improve along with global economic growth, or growth in specific sectors that use particular metal or mineral products, because that growth pushes up commodity prices. Companies that mine precious metals like gold and silver generally benefit from economic uncertainty.
Investors also need to distinguish between majors and juniors. Large mining companies that are well capitalized and well diversified are generally less volatile — both on the upside and the downside — than junior mining companies that have a limited number of projects and focus on just one or a smaller number of commodities.
All mining companies face tough decisions around investing in highly capital intensive projects that have long payoff periods, and they must also deal with a shifting regulatory environment, and political instability, in the regions where they operate.
That up and down story of the mining sector is reflected in the recent fortunes of four Canadian mining companies.
Vancouver-based Teck Resources Ltd. (TSE:TECK.B)., is a large diversified mining company producing metallurgical coal, copper and zinc. Its stock fell below $4 during the global financial crisis, soared to above $60 in early 2011, then fell back down to below $5 in early 2016. It now sits around $27, as the prices of its key commodities gain momentum.
Toronto-based Barrick Gold Corp. (TSE: ABX), saw its shares fall from more than $50 in 2011 to less than $10 in 2015, as gold prices sank due to low demand and increased supply. The stock has now recovered to around $20.
It's not just supply and demand that drives investor sentiment in the mining sector. There is also a geographical risk for companies operating in remote locations around the world. Each jurisdiction has its own legislation and culture, and changing governments can sometimes upend development and production plans. It's not uncommon to see volatility with a mining company stock due to a disagreement with a government that threatens its operations. A recent example is the volatility in the share price of Eldorado Gold Corp. (TSX: ELD) after the Vancouver-based miner threatened to pull its projects in Greece over permit delays from the Greek government.
Vancouver-based precious metals producer Tahoe Resources Inc.'s stock (TSX: THO) has also been mired in volatility this year as the Guatemalan government has prevented it from operating its flagship mine while a court-ordered consultation process with indigenous communities takes place.
The last example illustrates why pension funds and other institutional investors are paying closer attention to the industry's environmental, social and governance (ESG) performance. Gaining and maintaining a social license to operate is critical in communities where mining companies operate, due in large part to their large environmental footprint. As a result, more investors want to see mining companies take meaningful steps to reduce waste, energy consumption and emissions, and to contribute to the long-term social and economic well-being of the communities where they operate.
So, is it time for individual investors to get back into mining stocks? There is no easy answer — it is up to each investor to decide.
Some investors believe the worst is over for the industry and that prices for most metals have stabilized amid stronger economic growth in China and the global economy as a whole. Some prominent U.S. hedge fund managers have been making bets on specific mining companies in recent months, in particular gold producers, given the metal's status as a haven in uncertain times.2 Investors are also interested in commodities, such as lithium, that are used to make electric batteries for the burgeoning electric vehicle market.3
For investors who want exposure to the mining sector in the context of a broadly diversified portfolio, mining sector mutual funds or ETFs can be a good choice. Some examples of ETFs include the iShares MSCI Global Metals & Mining Producers ETF (NYSE:PICK) and the iShares S&P/TSX Global Base Metals Index ETF (TSE:XBM).
Before buying a mining stock, fund or ETF, investors are advised to check what other broad-based or resource-specific investments funds or indexes they hold, to avoid unwanted duplication of investments in the sector. This is particularly the case for investors in Canada, given that the Materials sector makes up over 10 per cent of the value of the S&P/TSX Composite index.
The bottom line for investors who want to allocate a portion of their portfolio to mining stocks or funds: do your homework and be aware of the risks.
- China has accounted for the bulk of the global growth in metals consumption over the past 15 years. See World Bank Group. "Commodity Markets Outlook," April, 2017.
- See for example: Maiya Keidan, Ptratima Desai and Barbara Lewis, "Hedge funds be on bright future for metals." Reuters, September 18, 2017.
- See for example: Ryan Brown, "'Speculative frenzy' over electric cars and battery tech as investors mull lithium futures." CNBC, October 4, 2017.