This dirt-cheap FTSE 100 mining stock looks like a steal right now!

The FTSE 100 is full of stellar mining companies. I decided to run the numbers to find the best-valued stock for my portfolio.

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The FTSE 100 contains six world-class mining companies, and I am looking to add one to my portfolio.

That’s because I think we could be on the cusp of a commodity super cycle, as the world transitions from fossil fuels to materially intensive green technologies.

Guillaume Pitron, a metals expert, put it like this: “Over the next generation, we will consume more minerals than in the last 70,000 years.”

So, which FTSE 100 stock should I buy to get in on this metals boom?

The six miners

  • Anglo American is a diversified mining company with global operations in copper, diamonds, platinum, and iron ore
  • Antofagasta specialises in copper production in Chile and Peru
  • BHP Group is a global mining company with a portfolio of commodities including iron ore, copper, coal, and petroleum
  • Fresnillo explores, develops, and produces precious metals, primarily silver and gold in Mexico
  • Glencore is a diversified mining and commodities trading company involved in mining, processing, and trading of copper, zinc, lead, nickel, coal, and oil
  • Rio Tinto is a global mining company of commodities such as aluminium, copper, diamonds, and iron ore

Panning for gold…

Here are a couple of quick-and-dirty metrics to help me separate out the ‘pretenders’ from the contenders:

  • Total debt to tangible book value: the lower this ratio, the better. According to legendary natural resource investor Rick Rule, this is one measure of “balance sheet flexibility”. Commodity markets are viciously cyclical. The less debt a miner has on its balance sheet, and the longer the duration of its obligations, the better able it will be to survive lean times.
  • Price to free cash flow: this cash flow statement item shows how much money a company has left over to give back to shareholders or to invest in new projects, relative to the company’s market cap. Mining is a fiercely capital-intensive business. It’s essential I check how capable each company is to deploy new money to opportunities that cross its path.

Running the numbers

Based on the latest figures available, I worked out the ratios and found BHP to be the best-looking option.

Although Glencore has a slightly lower price/FCF ratio, its total debt as a proportion of tangible book value is much higher than BHP’s.

Total debt to tangible book valuePrice/FCF
Anglo American59%12
Antofagasta38%Negative FCF
BHP Group39%9
Fresnillo35%19
Glencore67%7
Rio Tinto28%12
Data source:Yahoo Finance; author’s calculations

Of course, before buying BHP, I would like to do more research into its projects and the outlook for the commodities it is most heavily involved in mining. Potential risks of investing in BHP include commodity price volatility, operational risks, political and regulatory risks, and environmental and social risks.

This simple exercise gives me a jumping-off point. I can now rule out Antofagasta, for instance, as I am scared away by its negative free cash flow.

I will now focus my research on BHP, as well as Rio Tinto and Fresnillo, which all look to have strong balance sheets and to be priced cheaply compared to free cash flow.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

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