The FTSE 250 has three high-quality mining companies that I’m considering for my portfolio.
According to metals researcher Olivier Vidal, of the University of Savoy Mont Blanc, “Humanity is using mineral resources at an unprecedented level. Demand will continue to grow over the next few decades...”
Vidal attributes this to “the economic development of populated countries and the energy and digital transitions”.
These seem like unstoppable macro-trends to me. But which FTSE 250 mining stock should I buy to take advantage of these tailwinds for commodities?
The three ore-migos
- Centamin is a gold-mining company with half a century of experience, known for its flagship Sukari mine, which is the largest single gold-producing operation in Egypt. In addition to Sukari, Centamin also has exploration projects in West Africa.
- Ferrexpo is an iron ore producer with assets in Ukraine. Its three iron ore mines in the war-torn eastern European nation managed to produce 6.1 million tonnes of iron ore pellets in 2022 despite the conflict. Still, that was a year-on-year decrease of nearly 70%. The miner’s operations are located in the Poltava region of Ukraine, which is in the central part of the country and has been relatively unaffected by the conflict raging in the eastern regions of Ukraine.
- Hochschild Mining is a precious metals mining company with a presence in the Americas. The FTSE 250 miner has a portfolio of silver and gold operations in South America.
The pick of the litter
Here are a couple of metrics that I use to help me find the best mining companies out there.
Firstly, there’s the total debt to tangible book value ratio. A lower ratio is generally better. According to natural resource investing expert Rick Rule, this is an important measure of “balance sheet flexibility”. In the volatile world of commodity markets, having less debt and longer-term obligations can help a miner weather lean times.
Another metric I consider is the price-to-free-cash-flow ratio. This tells me how much cash a company has available to give back to shareholders or invest in new projects, relative to its market value.
Digging into the digits
Based on the latest figures available, I worked out the ratios and found Ferrexpo to be the most attractive option by a mine shaft’s depth.
Ferrexpo’s debt is negligible compared to the value of its tangible assets, and it is priced at an unbelievably cheap price-to-free-cash-flow ratio of just 1 (although that is based on free cash flow figures from before the Russian invasion of Ukraine).
Centamin and Hothschild Mining’s figures do not look half bad, either:
|FTSE 250 miners||Total debt to tangible book value||Price/FCF|
Still, all that glitters is not gold. I’d want to dig into the risks each company faces before buying any of them. For example, Ferrexpo operates in war-torn Ukraine, which is impacting its access to transportation, staff, and raw materials. As long as the conflict continues, its production and earning capacities will be massively constrained. That explains its bargain-basement price tag.
Still, this exercise has got my mining cart rolling as I continue my search for a FTSE stock to ride a potential commodities supercycle.
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Mark Tovey 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.