The world’s population is continuing to grow, and people in the West have become accustomed to a standard of living that many emerging markets want to emulate. It will require natural resources to make this happen, which is why demand for energy, metals, and fertilisers is rising. This gives me reason to believe shares in mining companies could be a positive addition to a diversified Stocks and Shares ISA. The world’s largest metals and mining company, BHP Group (LSE:BHP), is involved in all these areas and more.
Stable and consistent
BHP mines for copper, iron ore, nickel, metallurgical coal, petroleum, and potash. It also produces crude oil and condensate, gas, and natural gas liquids. There’s a lot of positive sentiment building around the long-term need for natural gas. This is something that BHP supports as it strives to bring down its carbon emissions. To this end it’s chartering five bulk iron ore carriers powered by LNG to transport its iron ore from Australia to China, its biggest customer. This should reduce its greenhouse gas emissions, on these journeys, by over 30{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b}. The contract will run for 5 years from 2022. The BHP share price is up 16.5{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b} in the past six months and down 7{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b} in a year. As far as mining companies go, the long-term BHP share price reflects a relatively stable and consistent company.
BHP has a price-to-earnings ratio (P/E) of 14, its earnings per share are £1.17, and dividend yield is 5.9{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b}. I think its diverse range of operations, in a variety of nations, will stand it in good stead going forward.
Rio Tinto’s share price falters
The Anglo-Australian multinational miner, Rio-Tinto (LSE:RIO), produces iron ore, copper, diamonds, gold, and uranium. The Rio Tinto share price is up 23{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b} in the past six months and 9{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b} in the year, which has a lot to do with the recent bull run on gold. Copper has also been doing well in this regard, but Rio had to cut its full-year refined copper guidance after reporting problems at a US mine.
Unfortunately, the company recently suffered a blow to its reputation after damaging sacred Aboriginal sites. It has since apologised and cut the bonuses of three executives. It’s now under increasing demand for greater accountability from a leading UK pension group and several major Australian super funds. This backlash has brought negative sentiment to the Rio-Tinto share price in recent weeks.
Yandicoogina mine, Pilbara, Australia. Source: Rio Tinto
One of Rio Tinto’s biggest shareholder draws is its juicy 6{429fc2506e610357e12b2a5665db82631200a2e00b3a1d8839077d76f18e2e8b} dividend yield, but that may not be enough to keep investors interested if major funds sell on the belief it’s not doing enough to protect the environment it works in. Rio Tinto has a P/E of 9 and earnings per share are £3.68. If you can cope with the volatility, it remains a powerful company producing commodities in demand.
Long-term vision
The global economic outlook is on shaky ground, and geopolitical tensions are cause for concern. This means mining continues to be a risky investment, but that doesn’t mean we should avoid it. I look at it as a long-term investment play, rather than a short-term trade. The big players in the territory are the ones likely to stick around and, as part of a diversified portfolio, I think BHP Group and possibly Rio Tinto could be reasonable, albeit volatile, long-term investments.
More reading
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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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