Industrial Metals vs Precious Metals

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Which of These Two Industries Hold the Most Opportunity Within the Public Markets?

Metals have always been attractive investments for those looking to diversify their holdings. However, with COVID-19 causing economic instability and international relations tense, it is more important than ever for investors to understand what their options are when planning to enter the market.  

Once investors know what types of metals do well under different circumstances, they can consider which companies to look at.

The Metals Industry

A sub-sector of basic materials, the metals industry consists of 2 types of companies.  One is involved in mining, processing, and distributing precious metals.  Silver, gold, and platinum group metals (PGM) are the most popular.  

The other type of company focuses on mining and processing base metals such as copper, iron ore, and aluminum for industrial use.  

Of course, most of the larger mining companies will deal in both precious and base metals, which investors should consider when deciding which stock to buy.

Divergent Response to Economic Conditions

Base and precious metals behave differently in response to economic conditions.  Generally, the demand for base metals increases with the economy's strength.

As industrial production rises, so too does the price of materials used.  The advent of COVID-19 brought on a recession that dampened demand and lowered the value of many industrial metal stocks.  

However, as the economy has begun to recover and eyes turn towards infrastructure, many experts predict significantly increased demand.

On the other hand, precious metals follow the inverse of the economy.  Since so many people prefer gold, silver, and platinum for their intrinsic value and to hedge against inflation, demand rises as the economy falls.  

So again, COVID-19 is instructive.  Prices of gold and silver broke records at the height of the pandemic, and now, as the economy begins to recover, demand has started to recede.  

Prominent Stocks: Precious Metals

#1 – Wheaton Precious Metals (NYSE:WPM)

Wheaton Precious Metals is a metal streaming company.  They provide up-front funding to smaller mining companies in return for a right to purchase the extracted materials for a set price.  

Profits come from the difference between their purchase price and the value of the metals on the open market.  Wheaton Precious Metals is one of the largest such companies globally and focuses on gold, silver, platinum, and cobalt.  Their earnings have been impressive and steady in recent years.

#2 – Newmont Mining (NYSE:NEM)

Newmont Mining is the world's largest gold mining company and the 4th largest silver producer.  With interest in copper, zinc, and lead, they are diversified across the two broad groups of metals, making them resistant to fluctuations in the economy.  

#3 – First Majestic Silver (NYSE:AG)

First Majestic Silver is a compelling prospect for investors looking for the greatest possible exposure to silver.  In 2021, 56% of their revenue was from silver, which does not seem likely to decrease in 2022.  

They are investing a great deal in becoming the largest primary silver producer globally, which could potentially bring a great return. Demand for silver is high, and it is the most useful of all precious metals in the industrial sector, so its price is resilient.

#4 – Sibanye-Stillwater (NYSE:SBSW)

Sibanye-Stillwater is a reliable gold producer, but their main attraction for some is their heavy investment in metals for EV batteries.  As the largest PGM producer in the world, they have been a strong bet for years.  

Those who got in early are glad they did; early 2022 has been very kind to Sibanye-Stillwater, and (as of this writing) they sit in the top 5% of all stocks in the IBD Composite rating.

Don’t Ignore the Juniors

B2Gold (NYSE:BTG) was founded in 2007 in Vancouver by Clive Johnson, the CEO of this once junior gold mining company.  Junior mining companies are essentially startups.  They are usually still in the exploration phase and have not yet turned a profit.  

Nevertheless, from 2010 to 2020, B2Gold saw returns of 271.53%, outperforming every other junior gold mining company over the same period.  Although companies like this carry a great deal of risk, B2Gold has shown why they are still attractive prospects for many investors.

Prominent Stocks: Industrial Metals

#1 – Aluminum – Alcoa (NYSE:AA)

Alcoa is an integrated producer of aluminum.  It has one of the world’s most productive operations for mining bauxite, the precursor to aluminum.  

They are currently investing in green production methods, most notably ELYSIS, a collaboration with Rio Tinto (see below) to develop a net-zero carbon emission method of producing aluminum.  Alcoa reinstated its quarterly dividends program in late 2021, and many investors are optimistic about its future.

#2 – Aluminum – Century Aluminum (NASDAQ:CENX)

Another company trying to improve its carbon emissions profile, Century Aluminum, has brokered a deal to have much of its energy supplied by several wind farms.

In addition, century Aluminum has recently expanded its smelting facilities in Kentucky and South Carolina to keep up with demand, which is likely to remain high.

#3 – Copper – Southern Copper (NYSE:SCCO)

One of the largest integrated copper producers globally, Southern Copper holds the world's largest reserves and is the 5th largest producer overall.  

The legacy sources of copper may be dwindling, but Southern Copper has approved several large-scale expansions and is committed to keeping up its generous dividend structure in the future.

#4 – Copper – Freeport-McMoRan (NYSE:FCX)

Freeport-McMoRan is a vast copper producer, mainly due to the productivity of the Grasberg Mine in Indonesia, one of the world's largest joint copper and gold sources.  In addition, the company is expanding in Arizona and Chile and intends to use 50% of its excess cash for share repurchases and dividends.  

#5 – Iron Ore – Rio Tinto (NYSE:RIO)

Rio Tinto is well diversified across the industrial metal space, but its most significant profit has come from its iron ore production.  

It has an extensive network of assets in Australia, including processing plants, rail lines, and port facilities, which keep costs down.  Rio Tinto is also a world leader in aluminum production, controlling quality bauxite mines and its own refineries and smelters.  

Where Do You Put Your Money?

The current geopolitical instability makes it difficult to predict where things are headed.  Lithium, aluminum, graphite and magnesium seemed poised to generate significant returns for their investors.

Still, the emerging crisis in Ukraine could have a considerable impact on the global economy if it escalates out of control.  

If it becomes more than a regional dispute, many investors could return to the age-old safe bets of gold and silver, and between them, silver may be the one to watch.  It has intrinsic value but is incredibly useful in technology, too.  Perhaps it provides the best balance between the traditional roles of base and precious metals.

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