Did you know Canada is a leading mining nation, because of its rich natural resources? Canada ranks first in potash production, second in uranium production, third in platinum group metals, and fourth in aluminum. The Toronto Stock Exchange (TSX) and TSXV have listed 43% of the world’s public mining companies. This rich blend of metals and mining stocks helped the TSX outperform the Nasdaq in 2022 as commodity prices surged. Commodity prices will likely remain volatile throughout the year, as the Russia-Ukraine war disrupted the global supply chain.
While this data looks exhilarating, you should determine if mining stocks meet your investing needs.
Does your portfolio need a metallic finish?
Mining stocks are an alternative investment, as companies have no control over prices. They determine their mineral exploration and deposit appraisal capital spending based on market conditions and commodity prices. Hence, precious metals remain at the top of exploration spending (65.3% of the total spending in 2020).
Different metals react differently to the global economy. For instance, investors consider gold and silver a safe haven and buy more in a recession. Gold prices skyrocketed during the 2009 Financial crisis and the 2020 pandemic crisis. At the same time, prices of industrial metals fall in a recession as production slips. However, their prices surge in a growing economy where industrial production is booming.
When you diversify your portfolio, a mix of such assets that have opposite reactions to a particular situation can prove beneficial. This way, one’s profit could fade other’s loss, bringing balanced returns to your portfolio.
How to trade in mining stocks
Metal and mining stocks are affected by commodity prices. Hence, if you want exposure to the gold price, like Warren Buffett, invest in Barrick Gold (TSX: ABX)(NYSE: GOLD) stock instead of physical gold. You will get exposure to gold without the hassle of storage and security cost.
Mining companies are cyclical stocks whose revenue is determined by market demand and supply. If you are lucky at buying and selling these stocks in the right cycles, you could earn some significant returns in a short period.
For instance, Barrick Gold stock surged 37% year to date. Most of this surge (31%) came between February 10 and March 8, as investors feared interest rate hikes and as Russia declared war on Ukraine. Similarly, uranium producer Cameco (TSX: CCO)(NYSE: CCJ) stock surged 65% since January 27, as sanctions on Russia got the United States looking for alternative uranium suppliers.
Now, it is impossible to time the market. But you can look at the overall demand environment for the metal and invest in industry leaders, as they benefit more from low production costs. In the above example, Barrick Gold and Cameco are the world’s second-largest gold and uranium producers. Lower production costs increase their profit margins in an upturn and reduce their losses in a downturn.
If you are looking for a metal to invest in, lithium and uranium have an attractive demand outlook given their usage in electric vehicles (EV) and nuclear energy.
One Canadian mining stock to buy now
Lithium prices have surged sevenfold, as EV demand picked up. However, EV production is still constrained, as the war has extended the semiconductor supply shortage. But the pent-up demand for EVs is expected to keep lithium prices high. High prices have encouraged producers to expand mining, and Lithium Americas (TSX: LAC)(NYSE: LAC) is one of them.
LAC does not earn revenue yet, as it is still developing lithium mines. It reported a net loss of $38.5 million in 2021. The company aims to start the first production of battery-grade lithium carbonate equivalent at Cauchari-Olaroz in mid-2022 and second-stage production by 2025. It has also acquired Millennial Lithium’s Pastos Grandes lithium project, which is expected to start production by 2024. But the growth catalyst for LAC is the Thacker Pass Project, which is believed to have the largest lithium resource in the United States.
LAC stock is currently down 20% from its recent high. This is a good time to buy the stock and book your seat in future bouts of growth in lithium prices.
