Gold has outperformed the FTSE 100 index by nearly 50% over the last year, hitting a seven-year high of around $1,700 per ounce. With the global economy facing recession, I can understand why people are buying gold stocks. But the actions of a top gold miner make me think that FTSE 100 shares offer better value at the moment.
Where’s the smart money going?
Barrick Gold boss Mark Bristow is one of the world’s top gold mining execs. He’s better known to UK investors as the man who founded Randgold Resources and turned it into a FTSE 100 stock.
Mr Bristow is now on the acquisition trail. However, he’s not buying gold. He’s looking for copper mines
In an article in the FT this week, Mr Bristow said that “the gold price is up and the copper price is down”. He sees opportunities to buy copper mines now and benefit from expected long-term demand growth.
Mr Bristow’s strategy reminds me of Warren Buffett’s advice that we should “be greedy when others are fearful”. Investors are greedily buying gold at the moment, while avoiding copper. To me, this suggests that it’s probably a good time to buy copper, but a bad time to buy gold.
Copper-bottomed FTSE 100 shares
The price of copper has fallen by about 10% so far this year, due to fears that we could be heading into a global economic downturn.
That’s a risk. But I think the long-term picture is much stronger. Copper is required in all electrical equipment. Motors and generators such as those found in electric cars and wind turbines use a lot of copper. If we’re to make the shift to renewable energy, we’re going to use a lot more copper.
I’ve been looking for FTSE 100 shares that provide good exposure to copper. There are a few to choose from, all of which I’d be happy to own. Here are my top picks.
FTSE 100 copper + gold play
Copper mines often produce gold as well. If you want to focus on copper while keeping some exposure to gold, then one FTSE 100 share I’d consider is Antofagasta. This £8bn family-controlled firm operates in Chile, where it produced 770,000 tonnes of copper and 289,000 ounces of gold last year.
The company’s mines enjoy fairly low costs and the group generated an operating margin of 28% last year. Although 2020 is expected to be a difficult year, analysts expect profits to recover in 2021. Debt levels are kept low and although the forecast dividend yield for 2020 is only 2%, this is expected to increase to 3.3% in 2021.
I can see some attraction in owning Antofagasta, but the firm’s lack of diversification does carry some risks.
A safe 6% yield?
All three of the big FTSE 100 mining stocks — BHP, Rio Tinto and Anglo American — offer some exposure to copper. But based on recent results, BHP makes more money from this industrial metal than its rivals.
In 2019, I estimate that more than 20% of BHP’s operating profit came from copper, compared to around 10% for Rio Tinto and 14% for Anglo American.
At the time of writing, BHP trades on around 10 times forecast earnings and offers a 2020/21 yield of 6.6%. I reckon this FTSE 100 share looks cheap and could be a great long-term buy.