I don’t invest in ASX mining shares but if I did buy some, the first three shares I’d consider are BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Northern Star Resources Ltd (ASX: NST).
Making The Case For ASX Mining Shares
If a foreigner asked you, ‘what’s Australia like?’ you’d probably say something to effect of, ‘we have great beaches, wide-open spaces, great people (of course), and lots of natural resources’.
Australia’s great mining boom, which took place between the late 80s and early 2010s, has been one of the driving forces behind our country’s continued economic prosperity. For example, did you know we hold the world record for the longest period without a recession?
Underpinning this seemingly endless economic growth are mining companies, explorers, infrastructure owners, service providers and technology businesses which help to get commodities like iron ore, copper, coal and gold out of the ground, trained to ports and shipped to customers around the world.
Given our expertise, many Australian mining and resources businesses are, in fact, global mining businesses. What’s more, while there are so many Australian mining companies on the local share market, our shores have attracted miners from all around the world.
Investing In Resources Shares Can Be Risky
As always, while it can be great to invest in the ‘boom time’, investing directly in shares of mining and resources companies can be extremely risky because the failure rate is enormously high, it’s costly to build mines and even after a mine has reached the production phase there are no guarantees the company will be able to sell its product/commodity for a reasonable price.
That’s because no single mining company has complete control over the global market for their products. I say this because I choose not to invest in mining shares for this reason and to make sure you tread lightly and think about the risks before buying shares in any of the three companies I’ve listed below.
1. BHP Group Ltd
BHP is a global resources company, extracting and processing minerals (like iron ore and copper), oil and gas, and has more than 60,000 employees and contractors, mostly in Australia and the Americas. Headquartered in Melbourne, BHP has shares listed on both the ASX and London Stock Exchange (BHP Billiton Plc).
I especially like BHP shares because they are diversified and its competitive advantage is what I consider to be ‘efficient scale’. Meaning, BHP should be able to weather the storms of low commodity prices for longer than most companies thanks to its mining efficiency and diversification. And when a commodity price rout inevitably comes BHP could use its financial firepower to buy other mines or projects from smaller players (which are struggling to stay afloat) to expand its resource base.
BHP shares trade at a respectable fully franked dividend yield of 5% fully franked.
2. Rio Tinto Limited
Loosely translated from Spanish to mean ‘red river’, Rio Tinto’s origins date back more than 145 years, but today it is one of world’s largest aluminium and iron ore producers, with much of its sales revenue coming from its operates in Western Australia. It also owns, fully or partly, mining projects for copper, diamonds, uranium and other minerals.
Like BHP, Rio is one of the market leaders for each of its core commodity groups. For example, with the recent setbacks to iron ore competitor Vale, Rio Tinto is arguably now the global leader in the production of iron ore, an important steel-making ingredient witnessing huge demand from Asian markets in particular.
Based on its last dividend payment Rio Tinto shares trade at a fully franked dividend yield over 5%.
3. Northern Star Resources Ltd
Northern Star Resources is one of Australia’s largest gold miners, with operations in Western Australia, Northern Territory, and Alaska. NST claims to have tier-1 world-class mining projects in very promising regions thanks to their low sovereign risk. NST shares have performed exceptionally well since 2010 — when they traded at just 2 cents! — thanks to its very savvy management team and carefully executed acquisitions.
Indeed, Northern Star is probably the Aussie gold mining communities’ greatest success story of the past decade. What I like about Northern Star is its proven management team, high-grade reserves (which widen profit margins on sold produced), strong balance sheet (it had ~$200m of net cash at June 30, 2019) and acquisitive strategy. Unlike other industries, oftentimes it makes sense for mining businesses to acquire smaller competitors and exploration tenements because it means they don’t need to do all of the costly exploration or development themselves.
Northern Star shares trade at a historical dividend yield of 1.3% fully franked.
Buy, Hold Or Sell?
I’m not a buyer of mining shares. However, if I did invest I’d prefer to stay with proven companies which have years of high-grade resources, low costs and aligned management teams. If you forced me to pick one of the shares above I’d choose Northern Star for growth and BHP for dividend income.
For what it’s worth I’d much rather buy shares in the companies in the free investing report below.
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Disclosure: At the time of publishing, Owen does not have a financial interest in any of the companies mentioned.
