Australia has a mining industry, which accounts for approximately 10% of GDP and employs over 250,000 people. Mineral resources like zinc, lead, iron ore, coal, gold, copper, lithium, uranium, and several others abound in Australia. Mining stocks may provide exposure to the global demand for these commodities, capital gains, and dividends.
Nonetheless, investing in asx mining stocks entails some challenges including some environmental, and social concerns, uncertainties associated with the regulations, geopolitical issues, commodity price variations, operational costs, and existing competition. Thus, investors should learn more about mining stocks and find the best ones to invest in ASX.
This article provides some tips on what to consider before you buy mining stocks. It then profiles seven of the best mining stocks on ASX according to their performance, outlook, valuation, and dividends.
Things to Consider Before Investing in Mining Stocks
Before investing in mining stocks, investors should consider the following factors:
- Commodity prices: The revenue generation and profitability of the mining company are driven by the price of the commodity the mine produces or explores. Several things affect commodity rates ranging from supply and demand, the worldwide economy, geopolitical events, foreign exchange fluctuations, and market perception amongst others. Mining stocks are very susceptible to the trends and forecasts of the commodity prices that drive them, so investors should watch them closely and consider the risks of fluctuating prices carefully.
- Production and exploration: The output, reserves and growing prospects of the mining company are dependent on its production and exploration activities. For this reason, investors must choose mining companies with quality assets, cheap operations, efficient governance, and a robust growth pipeline. Lastly, investors should assess the mining company’s exploratory potential with chances of finding additional sources or extending those that already exist.
- Valuation: The value of the mining company compares to the market value based on earnings, assets, cash flow or other measures. Investors need to check against the mining company’s valuation with its competitors and the industry average as well as its historical levels, where they see undervalued or overvalued stocks. The investors should also look at the prospects for the mining firm and adjust their valuations accordingly.
- Dividend: Dividend refers to the part of a mining company’s earnings that goes to its owners. Dividend consistency and growth a signs of financial strength, shareholder friendliness, and stable income. Moreover, investors need to consider dividend yield, which is the annual divided by the share price, comparing it with the industry average and the interest rate. High dividend yield is good but it may also suggest a distressed or risky stock.
7 Best Mining Stocks to Invest on ASX
After considering the factors mentioned above, here are seven of the best mining stocks to invest in on ASX, based on their performance, growth prospects, valuation, and dividend yield. Note that this is not a comprehensive list, and investors should do their research before making any investment decisions.
- BHP Group Ltd (ASX: BHP): BHP is the largest mining company in the world by market capitalization and one of the most diversified. It produces iron ore, copper, coal, petroleum, nickel, and potash, and has operations in Australia, the Americas, and Africa. BHP has a strong balance sheet, a robust cash flow, and a progressive dividend policy. It also has a promising growth pipeline, with projects such as Jansen potash in Canada, Spence copper in Chile, and South Flank iron ore in Australia. BHP has a trailing P/E ratio of 14.9, a forward P/E ratio of 11.8, and a dividend yield of 4.6%.
- Rio Tinto Ltd (ASX: RIO): Rio Tinto is the second-largest mining company in the world by market capitalization and the largest producer of iron ore. It also produces aluminium, copper, diamonds, gold, and uranium, and has operations in Australia, Canada, Mongolia, and South Africa. Rio Tinto has a solid financial performance, a low-cost structure, and a generous dividend policy. It also has strong growth potential, with projects such as Oyu Tolgoi copper-gold in Mongolia, Resolution copper in the US, and Simandou iron ore in Guinea. Rio Tinto has a trailing P/E ratio of 13.3, a forward P/E ratio of 10.8, and a dividend yield of 5.4%.
- Fortescue Metals Group Ltd (ASX: FMG): Fortescue is the third-largest iron ore producer in the world and the largest pure-play iron ore miner. It operates in the Pilbara region of Western Australia and has a low-cost and high-margin business model. Fortescue has a strong financial performance, a high return on equity, and a sustainable dividend policy. It also has a strategic vision to become a global leader in green energy and hydrogen, with projects such as Iron Bridge magnetite, Eliwana iron ore, and Pilbara Energy Connect. Fortescue has a trailing P/E ratio of 6.8, a forward P/E ratio of 7.2, and a dividend yield of 10.8%.
- Newcrest Mining Ltd (ASX: NCM): Newcrest is the largest gold producer in Australia and one of the largest in the world. It also produces copper and silver and has operations in Australia, Papua New Guinea, Indonesia, Canada, and Ecuador. Newcrest has a strong balance sheet, a consistent cash flow, and a prudent dividend policy. It also has a diversified and long-life asset portfolio, with projects such as Cadia gold-copper in Australia, Lihir gold in Papua New Guinea, and Havieron gold-copper in Western Australia. Newcrest has a trailing P/E ratio of 19.9, a forward P/E ratio of 18.1, and a dividend yield of 1.5%.
- Orocobre Ltd (ASX: ORE): Orocobre is a leading producer of lithium, which is a key ingredient for electric vehicle batteries and renewable energy storage. It operates the Olaroz lithium facility in Argentina, which is one of the lowest-cost and most environmentally friendly lithium projects in the world. Orocobre has a strong growth outlook, with projects such as Naraha lithium hydroxide in Japan, Cauchari-Olaroz lithium brine in Argentina, and Mt Holland lithium in Western Australia. Orocobre has a trailing P/E ratio of 97.8, a forward P/E ratio of 25.9, and a dividend yield of 0.6%.
- Paladin Energy Ltd (ASX: PDN): Paladin is a leading producer of uranium, which is a clean and reliable source of energy for nuclear power plants and one of the top ASX uranium stocks. It operates the Langer Heinrich uranium mine in Namibia, which is one of the largest and lowest-cost uranium mines in the world. Paladin has a positive outlook, as the demand for uranium is expected to increase due to the global shift to low-carbon energy sources. Paladin has a trailing P/E ratio of -3.6, a forward P/E ratio of -7.1, and a dividend yield of 0%.
- Northern Star Resources Ltd (ASX: NST): Northern Star is a leading producer of gold and one of the most innovative and efficient gold miners in the world. It operates in the Kalgoorlie, Yandal, and Pogo regions of Australia and Alaska, and has a high-quality and low-cost asset portfolio. Northern Star has a strong financial performance, a high return on invested capital, and a progressive dividend policy. It also has significant growth potential, with projects such as Kalgoorlie Super Pit, Jundee, and Tanami. Northern Star has a trailing P/E ratio of 21.8, a forward P/E ratio of 15.9, and a dividend yield of 2.4%.
While mining stocks like lithium stocks, gold stocks and more provide avenues for exploiting global demand for several commodities and opportunities for capital appreciation and dividends, they are also highly volatile. Nevertheless, there are risks associated with trading in mining stocks such as instability in the prices of commodities, environmental and social problems, uncertainty in regulation and operational costs. As such, investors have to be careful when selecting the most lucrative mining stocks to trade on the ASX.
Some of the best-performing stocks include the seven mining stocks mentioned above that are based on the performance of each, growth prospects, valuation, and dividend yield. Still, this is not an exhaustive list, and each investor is expected to make his/her own risk, objective, and time considerations before making the investment decision.