By Constantine Lycos
Mining and resource stocks have over the decades been a very important sector of the Canadian stock market. The inherent volatility, scandals, low overall sector rates of return, and the rise of the real estate sector and related industries as the primary sector of importance in Canada have meant that resource stocks declined in prominence in the last 15 years. However, a strong case can now be made in their favour.
Demand for minerals and metals
The demand for metals is very strong.
- The move toward clean energy initiatives is creating additional demand for metals and minerals. Wind, solar, electrified automobiles and their batteries are all adding significant demand for metals:
- Electric cars, for example, according to visualcapitalist.com contain on average 66 kg of graphite, 53 kg of copper (compared to only 22 kg in gas cars), 40 kg of nickel, 25 kg of manganese, 13 kg of cobalt, and 9 kg of lithium.
- Offshore wind-power plants, according to the International Energy Agency, require 13 times more mineral resources than a similarly sized gas-power plant.
- Infrastructure spending is projected to be dramatically higher in the next 10-15 years compared to the previous 10-15 years in huge projects such as power plants, roads, telecom, water, rail, airports, and seaports. According to Russell Investments, the key reasons for this are aging infrastructure needing upkeep in the U.S. and Europe, and new infrastructure spending, primarily in Asia.
Supply of minerals and metals
Meanwhile, the supply of metals and minerals is constrained. There has generally been underinvestment in the sector since just before the financial crisis of 2008 as investors decreased their exposure to the sector (as well as the oil and gas sector) due to ESG (environmental, social, and governance) concerns, as well as due to the prevailing preference to invest more heavily in long-term-growth sectors such as technology.
Additionally, new mines require a long timeline to reach the point of production, often 10 years or more. In light of this, and with valuations being quite good for the mining sector as a whole, we believe that investors should have significant exposure. While the S&P500 Index has less than 3% exposure to the industry, a good allocation could be 6-10%, with a corresponding reduced allocation to technology and financials.
Attractive investment options include:
Cameco (TSX:CCO $30.58, don’t pay over $33.00), the largest uranium producer in the world. With the world moving toward cleaner energy, nuclear power plants could become more important in the energy production mix.
Freeport-McMoran (NYSE:FCX $37.83, don’t pay over $40.00), the largest copper producer in the world. Electrification of vehicles requires copper. Copper is economically sensitive, and therefore a volatile stock pick – and we may be in a recession in 2023.
Tech Resources (TSX:TECK.B $52.07 don’t pay over $57.00), a diversified miner with copper and zinc (clean energy), as well as some coal and oil-sands production.