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At FTSE 100 contains six world-class mining companies, and I am looking to add one to my portfolio.
That’s because I think we can be at the peak of the commodity super cycle, as the world transitions from fossil fuels to materially intensive green technology.
Guillaume Pitron, a metallurgist, said this: “In the next generation, we will use more minerals than in the last 70,000 years.”
So, which FTSE 100 stocks should I buy to capitalize on this metals boom?
Six miners
- Anglo American is a diversified mining company with global operations in copper, diamonds, platinum, and iron ore
- Antofagasta specialization in copper production in Chile and Peru
- BHP Group is a global mining company with a portfolio of commodities including iron ore, copper, coal, and petroleum.
- Fresno explores, develops, and produces precious metals, especially silver and gold in Mexico
- Glencore is a diversified commodity mining and trading company involved in the mining, processing, and trading of copper, zinc, tin, nickel, coal, and oil.
- Rio Tinto is a global mining company for commodities such as aluminum, copper, diamonds, and iron ore
Panning for gold…
Here are some quick and dirty metrics to help me separate the ‘pretenders’ from the competitors:
- Total debt to actual book value: the lower this ratio, the better. According to legendary natural resources investor Rick Rule, this is one of the measures “balance sheet flexibility“. Commodity markets are viciously cyclical. The less debt a miner has on their balance sheet, and the longer their obligations, the better they will survive the lean times.
- Price to free cash flow: this cash flow statement item shows the amount of money the company has left to give back to shareholders or to invest in new projects, relative to the company’s market cap. Mining is a capital intensive business. It is important for me to examine how each company can deploy new money to the opportunities that cross its path.
Running numbers
Based on the latest figures available, I worked out the ratios and found BHP to be the best choice.
Although Glencore has a slightly lower price/FCF ratio, its total debt as a proportion of real book value is higher than BHP’s.
| Total debt to actual book value | Price / FCF | |
| Anglo American | 59% | 12 |
| Antofagasta | 38% | FCF is negative |
| BHP Group | 39% | 9 |
| Fresno | 35% | 19 |
| Glencore | 67% | 7 |
| Rio Tinto | 28% | 12 |
Of course, before buying BHP, I would like to do more research on the projects and commodity prospects that are most involved in mining. Potential risks of investing in BHP include commodity price volatility, operational risk, political and regulatory risk, and environmental and social risk.
This simple exercise gave me a jumping off point. Now I can write off Antofagasta, for example, because I’m afraid of negative free cash flow.
I will now focus my research on BHP, as well as Rio Tinto and Fresnillo, which all appear to have strong balance sheets and will be priced low compared to free cash.
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