If You Have to Buy a Mining Stock, Make it This One

A strong track record and a decent outlook help make this miner less risky.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

No sector has taken more of a beating over the past year than mining. The main problem has been a slowdown in investment activity in China, which has put some serious downward pressure on commodity prices. But the worst may be yet to come. Many observers think that China’s investment boom is in bubble territory. If they are right, and there is a crash, then commodity prices will surely sink further, spelling big trouble for mining companies.

If there is one mining company worth betting on, it’s copper miner First Quantum Minerals (TSX: FM). Below are two reasons why.

1. A strong track record

First Quantum approaches mining projects differently than most other miners do. Instead of hiring other companies to develop mines, First Quantum prefers to keep the bulk of the work in house. That has allowed the company to keep costs under control, something that the mining industry in general does very poorly. Over its history, First Quantum has developed $2.4 billion worth of projects within 6% of budget.

The company also has a history of buying mining assets at a discount. For example, its flagship Kansanshi mine cost only $1.7 billion to build and develop. Not long ago, the consensus net asset value on that mine was $3.8 billion.

This long history of strong performance has shown up in First Quantum’s share price, which over the last 15 years has returned 40% per year. Compare this with a company like Teck Resources (TSX: TCK.B)(NYSE: TCK), which has returned 13% per year over the same time period.

2. A decent outlook for copper

Last year First Quantum made over 70% of its revenue from copper sales, and copper accounts for the overwhelming majority of future growth too. Fortunately for First Quantum and its investors, the outlook for copper isn’t as bad as it is for other commodities.

While the market currently is in surplus, there is very little exploration activity going on, and few mines are being built. Costs are increasing, too, which means that by the start of the next decade, there will be a looming deficit. Meanwhile, copper demand should hold up even if China stops constructing apartment buildings; there are plenty of other areas where copper is used, including transportation, hospitals, and consumer products.

Compare this with a commodity like steel. The metal is used primarily in building structures, making it more dependent on China’s real estate boom than copper. This is bad news for a company like Teck Resources, which derives half of its gross profit from coal for making steel.

Over the past three years, First Quantum’s shares have returned -4% per year, while Teck’s have returned -21% per year. But as shown above, there’s still a strong argument that First Quantum is the bigger bargain, and more deserving of a spot in your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

TSX Today
Energy Stocks

TSX Today: What to Watch for in Stocks on Thursday, August 11

Rising commodity prices could take energy and mining shares on the TSX higher at the open today.

Read more »

Supermarket aisle with empty green shopping cart

$183 for Toilet Paper and Cups: Why We Love Costco Stock

"I literally went up there to get two things."

Read more »

A worker gives a business presentation.

TFSA Investors: 2 Top Stocks to Buy Before They Rally Any Further

Although plenty of top Canadian stocks have been rallying recently, these two still offer great value and are perfect for…

Read more »

growing plant shoots on stacked coins
Stocks for Beginners

3 TSX Stocks With High Dividend Yields

Are you looking for a great opportunity to bolster your portfolio? Here are three TSX stocks with high dividend yields.

Read more »

financial freedom sign
Stocks for Beginners

1st-Time Investors: 2 Cheap Canadian ETFs to Buy for Financial Freedom 

Investing for the first time but don’t know where to start? Here are two cheap Canadian ETFs that can grow…

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

Got $4,000? 4 Simple TSX Stocks to Buy Right Now

The macroeconomic environment is tense but investing can be simple. Here are four stocks to buy now and book your…

Read more »

Oil pumps against sunset
Energy Stocks

2 Top Canadian Energy Stocks to Buy Offering Dividend Yields Above 6%

These two top Canadian energy stocks are excellent long-term investments and offer unbelievable dividend yields if you buy them today.

Read more »

Target. Stand out from the crowd

4 TSX Stocks I Own and Will Buy More of if They Fall

These are my four top choices of TSX stocks that may dip in the future, but will pay me back…

Read more »