In the United States, inflation has increased to levels that cause policymakers grave alarm. According to the latest figures, inflation has reached a 40-year high of 7.9 percent, which was the cause of the recent rise in the price of precious metals.
Notably, the most recent inflation number does not include the current oil and gas prices increase. Consequently, inflation figures will worsen in the following months.
With growing geopolitical tensions and soaring inflation, precious metal equities are in the spotlight. In addition, due to the Russia-Ukraine conflict's impact on global economic development, authorities may refrain from dramatic rate rises.
In this uncertain environment, investors might benefit from holding actual gold or stocks of gold mining companies. Even with the recent increase in gold mining companies, the stocks are still appealing. As a result of the rise in the price of gold, cash flow visibility has improved, and gold miners will raise dividend payouts in 2022. Therefore, precious metal stocks have numerous favorable catalysts.
What Are Precious Metals?
Gold
We'll begin with the ancestor of them all: gold. Gold's resilience (it does not rust or corrode), malleability, and ability to carry heat and electricity set it apart from other metals. It has specific industrial applications in dentistry and electronics, but it is best known as a jewelry component and cash.
Gold's price is set by the market every minute of every day. Gold's price is less impacted by supply and demand than most other commodities, and the gold stockpiled above ground greatly outweighs the fresh mining supply. Said, when hoarders decide to sell, the price falls. When they are on the market to purchase, a fresh supply is swiftly absorbed, and gold prices rise.
Several reasons contribute to the rising interest in the yellow metal:
Gold is commonly sought as a safe store of value when banks and money are perceived as unreliable and political stability is unclear.
Inflation: When actual rates of return on equity, bond, or real estate markets are negative, investors routinely seek gold as a store of wealth.
People have historically hoarded gold during times of war or political instability. Even if your funds run out, you may still use them to buy food, shelter, or transportation to a less dangerous region.
Silver
Silver's price fluctuates between its perceived position as a store of value and its role as an industrial metal, unlike gold. For this reason, silver market price variations are more volatile than gold market price swings.
Consequently, while Silver will trade similarly to gold as a hoardable commodity, the industrial supply-and-demand equation for the metal exerts an equally powerful impact on its price. This equation has permanently altered in response to discoveries, such as:
The digital camera has usurped Silver's once-dominant position in the photography business since the silver-based photographic film has become obsolete.
The emergence of a massive middle class in the rising market countries of the East sparked an explosion in demand for silver-reliant electrical appliances, medical supplies, and other industrial goods. Silver's characteristics make it a valuable commodity, from bearings to electrical connections.
Utilization of Silver in battery, superconductor, and microcircuit markets.
It is uncertain to what degree these events will impact silver demand for non-investment purposes. Various applications influence Silver's price, and it is not merely used for fashion or as a store of wealth.
Platinum
Like gold and Silver, Platinum is traded continuously on global commodity markets. Because it is so rarer than gold, it tends to command a more excellent price (per troy ounce) during the call and political stability periods. Less metal is extracted from the earth each year.
Several elements influence the price of platinum:
Platinum is regarded as an industrial metal in the same way that Silver is. Automobile catalysts are the most critical platinum consumers since they help to reduce harmful emissions. After then, jewelry takes over as the item with the highest level of interest. Refinery catalysts, as well as the computer industry, make use of most of it.
Automotive sales and production data highly impact the prices of platinum because of their need for metal. Increased demand for catalytic converters might be spurred by legislation mandating more of them installed on cars. Recycled automotive catalysts or platinum's reliable and often less expensive twin metal palladium were first used by American and Japanese automakers in 2009.
South Africa and Russia are the only two nations where platinum mining is highly concentrated. This increases the likelihood of cartel-like conduct that would sustain or artificially increase platinum prices.
These variables combine to make platinum the most volatile of the precious metals, so investors should keep this in mind.
Palladium
Less well-known than the preceding three metals, palladium has more industrial applications. Palladium is a silvery-shiny metal that is utilized in various production processes, especially those involving electronics and industrial items. Additionally, it may be used in dentistry, medicine, chemistry, jewelry, and groundwater remediation.
The United States, Russia, South Africa, and Canada produce the most of this uncommon metal, with the atomic number 46 on the periodic chart.
In 1939, jewelers began using palladium in jewelry. When combined with yellow gold, this alloy produces a metal that is stronger than white gold. The government of Tonga released palladium coins commemorating the coronation of King Taufa'ahau Tupou IV in 1967, and this is the first documented usage of palladium as currency.
Should You Invest in Precious Metal?
Because precious metals have inherent value, are not susceptible to credit risk, and cannot be inflated, they give outstanding protection against inflationary pressures. This suggests that you are unable to make more copies. The "upheaval insurance" they offer protects investors from financial and political/military instability.
Precious metals have a low initial correlation with other asset classes, such as stocks and bonds, from investment theory. Even if they make up only a small percentage of a portfolio, Precious metals can help reduce volatility and risk.
Risks of Precious Metals
Every investment carries a unique set of risks. There is always a danger associated with investing in precious metals, although precious metals may offer some degree of security. Metals' prices might fall owing to technical instabilities (more sellers than buyers). However, economic uncertainty is advantageous for sellers as prices tend to increase.
1. Rio Tinto (NYSE: RIO)
Rio Tinto is a globally diversified mining firm. It focuses largely on producing industrial metals, particularly iron ore, aluminum, and copper, the three most frequently used metals.
Rio Tinto is the global leader in aluminum production. The corporation runs huge, high-quality bauxite mining, alumina refineries, and aluminum smelting facilities. It is an industry pioneer in utilizing carbon-free, low-cost hydroelectricity to power its aluminum plants. Additionally, Rio Tinto is a leading producer of iron ore, a crucial component of steel (the most-used metal alloy globally). The company's iron ore activities in Australia are comprised of an integrated network of world-class mining assets, processing centers, rail connections, and port terminals that contribute to cost efficiency. It supplements these leading businesses with a substantial copper and a significant titanium business.
Rio Tinto aspires to be a low-cost producer to mitigate the effect of metals price volatility. Rio Tinto is an excellent alternative for investors wanting wide exposure to the metals industry due to its diversity.
2. Nucor (NYSE: NUE)
Nucor is a diversified producer of steel and steel products in North America. It manufactures steel bars, plates, beams, steel fasteners, pipelines, and wire. Nucor also maintains a prominent scrap metal company that recycles and transports ferrous and nonferrous metals.
In contrast to most other steel producers, Nucor concentrates on running minimills, which utilize electric arc furnaces to melt scrap steel. This method is less costly than typical iron-smelting blast furnaces. Additionally, its facilities are generally powered by natural gas, which is less expensive than coal. In addition to its emphasis on employing recycled metals, Nucor is one of the lowest-cost steel manufacturers in the world.
In various economic scenarios, the firm has been able to generate a profit due to its generally ecologically friendly and low-cost operations. As a result, it may be a suitable investment for investors seeking a steelmaker with lesser risk.
3. Newmont (NEM)
Newmont shares have increased by 29 percent as gold prices have risen in the past six months. The recent pullback from previous highs appears to be a favorable accumulation opportunity for long-term investors.
The company's solid reserve foundation is a positive aspect of NEW stock. Newmont has 96 million ounces of reserves and 112 million ounces of resources. In addition, the corporation holds 45 billion pounds of copper reserves and resources. A solid reserve foundation guarantees consistent output and cash flow visibility.
The company's robust balance sheet is another reason to favor Newmont. Newmont reported $5 billion in cash and equivalents as of December 2021. In addition, the company's free cash flow in 2021 was $2.6 billion. Due to the recent increase in the price of gold, FCF is projected to accelerate substantially in 2022.
A robust bank sheet and cash flow allow Newmont to pay greater dividends and accelerate the buyback of its shares. Long-term, Newmont hopes to reduce its all-in sustaining costs to $800 and $900 per ounce, increasing the EBITDA margin further.
At a projected price-to-earnings ratio of 25.4, NEM stock appears to be appealing. The company warrants portfolio inclusion with favorable sector tailwinds and a dividend yield of 2.86 percent.
4. Barrick Gold (GOLD)
Barrick Gold is yet another reputable precious metals stock. Compared to Newmont, the stock's future P/E ratio of 22.6 is relatively inexpensive. Additionally, the GOLD stock offers a dividend yield of 1.64 percent.
Barrick Gold is very favorable from a cash flow viewpoint. The corporation recorded a free cash flow of $1.9 billion for 2021. The corporation also ended 2021 with $5.3 billion in cash and equivalents. This provides Barrick with substantial financial flexibility for growth initiatives.
Barrick estimates that the company's free cash flow will grow by $1.5 billion for every $100 per ounce increase in the price of gold. Therefore, I would not be shocked if the company's FCF in 2022 exceeds $3 billion.
In addition, Barrick's all-in-sustaining cost per ounce for 2021 was a reasonably competitive $1,026. If gold prices continue to rise in the next quarter, the EBITDA margin will expand significantly.
5. Wheaton Precious Metals (NYSE: WPM)
Wheaton Precious Metals is among the world's most extensive streaming firms. As a streamer, it offers mining firms an early payout to assist in developing a project. In exchange, it obtains the right to purchase a defined production quantity.
Wheaton Precious Metals' array of streaming contracts is diverse. It is permitted under its agreements to acquire gold, silver, palladium, and cobalt from a number of the world's largest mining corporations. Its streams comprise mines that are actively producing as well as those that are under development.
Through 2025, the company's contract portfolio enables it to purchase Silver and gold at average per-ounce prices of $5.81 and $451, respectively. The company may then sell the metals at market prices and pocket the difference. Wheaton's precious metal streaming contracts generated substantial profit, with gold ending 2021 at around $1,800 per ounce and Silver above $22. Wheaton's low-cost business strategy invests in precious metals, an enticing proposition.
In addition, Barrick has a strong reserve replacement ratio. By 2021, the corporation has "more than replaced its net gold reserves at a higher grade." Exploration programs will guarantee that the reserve life remains healthy, considering the budgetary flexibility.
Barrick announced a $1 billion share purchase in Q4 2021. With the increase in gold's price in 2022, dividend growth is probable. On falls, GOLD shares appear excellent for accumulation.
6. Franco-Nevada Corporation (FNV)
Franco-Nevada is Canada's premier gold-focused streaming and royalties corporation. With agreements on 325 mining assets, it manages a diversified portfolio of precious metals and royalty streams.
The company's consistent cash flow allows it to fund the costs of new agreements without accumulating debt. Royalty and streaming firms supply miners with upfront cash. In exchange, clients are granted the opportunity to acquire precious metals at discounted prices in the future.
Early in November, Franco-Nevada announced its Q3 results. Despite a drop in gold prices at the time, annual income grew by 13% to $316,3 million. The adjusted net income was $165,6 million, or 87 cents per share, up 9 percent year-over-year. Cash and equivalents were $346.7 million at the end of the quarter.
Following the news, CEO Paul Brink stated, "Rising energy prices have prompted us to increase our 2021 Energy projection for the second time in 2018. This year, margins have increased due to the inflation-resistant quality of our business strategy.
The FNV stock price fluctuates at $146, up 37% during the previous year. However, FNV shares are not inexpensive, selling at a multiple of 40,7 times projected earnings and 22.2 times trailing sales. The median price projection for Franco-Nevada shares over the next 12 months is $153. Before purchasing FNV shares, prospective investors could await a price decline.
7. Freeport-McMoRan (FCX)
Freeport-McMoRan, headquartered in Phoenix, Arizona, is the largest copper producer in the world. The company's holdings include the Grasberg mining complex in Indonesia, the world's biggest copper and gold mine in terms of recoverable reserves.
Copper has emerged as a crucial material in worldwide decarbonization measures, such as electric vehicles (EVs), solar panels, and smart buildings. Analysts emphasize the bright forecast for copper futures in light of accelerating global digitalization and EV adoption.
Goldman Sachs analysts remain upbeat on the copper market. In its most recent copper price study, the investment bank stated, "'being the cross-asset investor's preferred gauge for global growth, copper frequently trades with larger macro sentiment movements. Copper is a physical item whose futures price is ultimately related to the capacity to supply physical units into the exchange if these inventories are depleted, its price must balance the market regardless of the state of the economy as a whole.'"
On January 26, Freeport revealed its Q4 2021 results. Revenue rose by 38 percent year-over-year to $6.2 billion. The net income grew to $1.11 billion, or 74 cents per share, from $708 million, or 48 cents per share, the year prior. Cash and equivalents were $8,1 billion at the end of the quarter.
Copper prices continue to climb as inventories reach historically low levels. This drop-in reserves contributed to a 47 percent year-over-year rise in the average price per pound of copper to $4.33. Meanwhile, this boost in copper prices contributed to a 155 percent year-over-year increase in Freeport's operational cash flows, which rose to $7.7 billion.
8. Rio Tinto Group (RIO)
Rio Tinto Group is the second-largest metals and mining firm in the world. The firm discovers and mines several minerals globally, including diamonds, iron ore, copper, aluminum, and lithium.
The miner has agreed with the government of Mongolia to begin operations at the Oyu Tolgoi copper mine, and management expects the mine to produce 500,000 metric tons of copper annually. In addition, the miner is well-positioned to profit from the recent increase in iron ore prices due to China's steel industry's relaxing emission restrictions.
On February 23, Rio Tinto released its annual financials for 2021. Revenue rose 42% year-over-year to $63.5 billion. The net income was $21.4 billion, or $1.295 per share, up from $9.8 billion, or 60 cents per share, the previous year. In addition, the corporation produced $17.7 billion in free cash flow in 2021.
CEO Jakob Stausholm commented on the results as follows: "'The recovery of the global economy, driven by industrial production, resulted in significant price strength for our major commodities [...] achieving record financial results with free cash flow of $17.7 billion and underlying earnings of $21.4 billion.'"
With a dividend yield of 10.17 percent, Rio provides a dependable passive income stream. The corporation returned $15.4 billion in cash to stockholders during the fiscal year 2021.
The share price fluctuates at $78, up around 10.8 percent over the previous year. The share price is 7.7 times expected future earnings and 2.15 times trailing revenues. The median 12-month price projection for Rio Tinto shares is $74.08.
9. Steel Dynamics (STLD)
Steel Dynamics is a domestic steel manufacturer and recycler headquartered in Fort Wayne, Indiana. The firm primarily serves its steel products' construction, automotive, manufacturing, and transportation segments.
The company's manufacturing capacity of 13 million tons of steel makes it the third-largest manufacturer of carbon steel products in the United States. The steel manufacturer profited from the growing steel price and rising demand for steel in the construction, automobile, and industrial sectors.
Utilizing the year-over-year rise of 80 percent in the average selling price of steel in 2021, the firm produced a record 11,2 million tons of steel. In the previous year, it had 10.7 million tons.
Steel Dynamics released its Q4 2021 results on January 24. Revenue rose 104 percent year-over-year to $5.3 billion. The company's net income increased to $1.1 billion, or $5.49 per diluted share, from $188 million, or 89 cents per diluted share, in the same quarter. Cash and equivalents totaled $1.25 billion after the period.
Regarding the results, CEO Mark D. Millett said, "The team achieved an outstanding operational and financial performance in 2021, reaching record net sales of $18.4 billion, operating income of $4.3 billion, and adjusted EBITDA of $4.6 billion."
The price of STLD stock fluctuates at $61, up over 80 percent over the past year. The stock price is 4.4 times future profits and 0.7 times trailing revenues. The median price projection for Steel Dynamics stock for the next 12 months is $77.50.
10. First Majestic Silver Corp. (NYSE: AG)
First Majestic is eighth on our list of the ten most significant precious metals stocks to purchase right now. With many silver and gold mines, the corporation manufactures and sells its rounds and bars of bullion. Due to the robust output of the La Encantada and San Dimas mines, the company met the upper end of its 2020 estimate by producing 11,6 million ounces of Silver. The period's gold output totaled 100,081 ounces, just below the company's projections. The price of First Majestic shares has increased by 105 percent during the past year.
Conclusion
The price of metals may be rather volatile, especially if economic conditions deteriorate rapidly; therefore, investors should carefully consider if they can withstand the prices.
If the sector's upside potential is enticing, focus on identifying the metals stocks best positioned to profit from price increases. The best way to start is with these industry leaders, whose low-cost operations should assist in cushioning the impact if market conditions change suddenly. Then, prepare for a potentially turbulent ride in the short term, knowing that the long-term potential might make the volatility worthwhile.
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