Three Top Mining Stocks

It could be the best of times or the worst of times for miners. If a global recovery materializes, it will likely be the best. If pandemic-related economic turmoil persists, it could be the worst. But even in the latter case, some intrepid investors may want to hunt for bargains. Regardless of which scenario is more likely, here’s three mining stocks to consider. 

If you are among the legion of investors who likes to do what Warren Buffett does, Barrick Gold may be the stock for you.  

What likely got Buffett’s attention is free cashflow and lots of it. Barrick’s haul totaled roughly $2.2 billion over the trailing 12 months, up from $1.1 billion in 2019. Rising gold prices as well as its 2018 merger with Randgold accounts for the bump in free cashflow and perhaps Mr. Buffett’s attentions.

There’s more to Barrick than just cashflow. It’s got healthy fundamentals too. The company has trimmed its long-term debt from more than $12 billion in 2014 to just about $5 billion today, with $3.7 billion of cash on hand as of mid-year. Meanwhile Barrick doubled shareholder equity from about $10 billion to more than $21 billion as of 2019 delivering a less levered company, perhaps also attractive to Buffett, and the rest of us, since gold prices do vary with attendant impacts on companies like Barrick.  

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If you like Barrick, but want to drive something a little smaller, Kirkland Lake Gold is worth a look. By smaller, Kirkland, with a market cap of about $12 billion, operates three mines in Canada and Australia, while Barrick, with a market cap of $46 billion operates in 28 mines around the world. 

Arguably, Kirkland is financially stronger than Barrick (and for that matter perennial gold favorite Newmont), as it has no debt and about about $540 million in cash. Further, Kirkland should generate close to $1 billion in cash in this year.  Credit Suisse analysts expect the figure to more than double, to nearly $2 billion, in 2021.

Lately, investors have been drawn to consider Kirkland because of its January 2020 acquisition fo Detour Gold for $3.7 billion. As of the second quarter, Detour had already contributed approximately 40% of KL’s free cashflow. But there may still be upside. Detour’s production costs were higher than Kirkland’s, and as integration progresses, Kirkland may be able to wring more cash and profits out of the Detour operations.  

Kirkland’s dividend, at about 1.6% is nothing to be sneezed at and at a dividend payout ratio of about 14% of Credit Suisse’s 2020 earnings, it’s likely safe too.  

Rio Tinto has sold off since CEO Jean-Sebastien Jacques and two other senior executives stepped down in September after it was reported the company destroyed ancient Aboriginal heritage sites in Australia. In this ESG-fueled era, this was a big no-no. One could argue that the situation there violated the E the S and the G, a trifecta normally reserved for the most egregious of pillagers.  

But management changes are fleeting moments in the life of a mine, and with Rio, investors might profitably focus on the quality and diversity of the company’s mining assets. With 60 mining or related sites in 36 countries Rio participates in the iron, aluminum, copper, titanium and borates which makes it a commodity play, but one that is diverse, and insulated from the volatility of gold.  

And whoever steps into the executive suite, will reap the benefit of declining debt from about $13 billion in 2016 to about $4.8 billion and ditto for stable operating margins which have been north of 40% since 2017

This year has tougher for Rio Tinto as earnings have retreated 3% to $2.94 for the first half of the year. That said, 55% of the company’s revenues come from China, and while other markets are mired in pandemic related slowdowns, China’s resurgence may give a boost to earnings when the company needs it most.  

Notable also for investors who like cash, and who doesn’t?, Rio is now yielding north of 6.5%. Unlike many dividends however, Rio’s is semi annual and tied to operating profits, so changes, up or down are inevitable.

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