Investing in ASX mining shares

What are ASX mining stocks?

Mining companies develop and operate mining projects that produce the metals, minerals, and other raw materials that serve as critical inputs for the energy, construction, and manufacturing industries, among many others.

While miners all do fundamentally the same thing – dig up stuff – they produce a range of resources. Miners might specialise in precious metals like gold and silver, industrial metals like iron ore and copper, rare earths minerals, coal, and even diamonds and other gemstones used in jewellery. Some large miners with multiple projects on the go will produce a combination of different materials.

The mining sector has been crucial to the Australian economy over the years, making up almost 70% of our country's exports in 2021,¹ and posting another record year of exports in FY22.²

The mining boom has helped propel Australia's economy forward, raising the nation's standard of living and lowering unemployment.

While specific resources – coal, in particular – may eventually be phased out, other mined resources will still be crucial to supporting the global economy's transition to renewables. 

Lithium, for example, is a critical component in the batteries used to power electric vehicles. Likewise, copper is vital for most solar and wind energy systems because it is a good conductor of electricity.

Why invest in them?

Mining is a significant part of the Australian and global economies. Miners produce the raw materials used in everything from skyscrapers and bridges to smartphones and home appliances, which can make certain metals and minerals extremely valuable.

What's more, Australia is a highly resource-rich country, meaning some of the biggest miners in the world are located here and trade on the ASX. This makes it incredibly easy for local investors to gain exposure to the mining industry.

Top mining stocks on the ASX

Mining companies form part of the ASX's materials sector. Most companies in this sector produce and refine raw materials like metals, minerals, oil, chemicals, and even lumber. The materials sector also includes the construction industry, which uses these raw materials to construct buildings and large infrastructure projects.

The companies in these industry groups are some of the largest (and oldest) currently listed on the ASX. BHP, for example, is well over 100 years old and has formed part of the bedrock of the Australian economy.

BHP

A genuine global mining behemoth, BHP deserves its spot at the top of this list. It is currently the largest mining company in the world and the most prominent company listed on the ASX in terms of market capitalisation.

BHP is the world's largest producer of coal, the second-largest producer of iron ore – behind Brazil's Vale SA – and is also one of the leading producers of copper and nickel. A little over 45% of BHP's revenue in first-half FY23 came from iron ore, with significant contributions from copper and coal. 

This makes BHP a good option for investors seeking lower-risk exposure to the commodity markets. Because BHP has such a large number of high-quality mining assets around the world, buying BHP stock allows you to access multiple commodity markets in a single trade.

Fortescue 

For investors simply seeking exposure to the iron ore market, Fortescue is an obvious choice. It is the largest pure-play iron ore company currently trading on the ASX, with large-scale mining projects in the Pilbara region of Western Australia.

Given Fortescue doesn't have a diversified portfolio of mining assets in the way BHP does, for example, Fortescue's share price tends to move in tandem with the iron ore price. This is great for bullish investors on the long-term prospects for iron ore. But it can also make it a more risky investment because it is entirely reliant on the success of the iron ore market. 

BHP or Rio Tinto might be a better option if you are more risk-averse or seek exposure to a basket of industrial or precious metal commodities.

Having said that, Fortescue has branched out from just mining iron ore. Today, it is heavily invested in its global green energy business, Fortescue Future Industries (FFI). Operating in 25 countries, FFI has two missions: To build a global portfolio of hydrogen, geothermal, solar, and wind projects and to decarbonise Fortescue's mining operations.  

Rio Tinto

Rio Tinto is a dual-listed mining stock listed on the ASX, the London Stock Exchange, and the New York Stock Exchange. It's the second-largest mining company in the world by global market capitalisation, after BHP. 

A diversified miner with global operations, most of Rio's earnings come from its extensive iron ore assets. It also produces aluminium, copper, and other minerals, including diamonds.

Like BHP, Rio exposes investors to several different metals and minerals commodity markets. As we've just discussed, this characteristic makes an investment in Rio Tinto potentially less risky than an investment in a company like Fortescue, which relies entirely on the price of iron ore for its revenue. 

If the price of iron ore suddenly falls, it's likely that Fortescue's share price will also tumble. However, miners like Rio generate some revenue from other assets besides iron ore, so their share prices may prove more resilient.

What might the future hold for Australia's mining industry?

Unfortunately for Australia's miners, the outlook for the industry is much more uncertain now than it was before the pandemic. The prices of many minerals, including common metals like iron ore, copper and nickel, have been particularly volatile in recent years. 

The ongoing impacts of conflicts in the Middle East and between Russia and Ukraine, high inflation and interest rates, and weaker property markets – particularly in China – mean that price volatility may persist for quite a while yet.

However, demand for metals and other mined raw materials should remain strong over the long term. A rebound in the Chinese economy would almost certainly provide strong tailwinds for the sector, as would an end to hostilities in Ukraine and the Middle East.

And even as the world transitions to renewable energy, the metals required for complex technological products like solar panels and major infrastructure like wind turbines will be in high demand.

Benefits of investing in mining shares

There are many benefits to investing in ASX mining stocks, some of which are outlined below:

Mining is a fundamental part of the global economy: It is one of the world's oldest industries and has helped advance civilisations. Without metals and minerals, we wouldn't have many of the modern technologies we rely on in our daily lives.

It produces essential materials: Miners produce the raw materials required by almost every other sector of the economy. For example, steel is vital to the construction and manufacturing industries, aluminium is required to build aeroplanes, and copper is one of the key materials used to build renewable energy systems like wind turbines.

Mining stocks are great diversifiers: Mining shares can provide diversification benefits for your portfolio by providing exposure to many commodity markets. This means they may exhibit different return characteristics to other shares on the ASX. 

Companies that mine gold, for example, are sometimes considered 'defensive' investments. Defensive investments are shares or other assets that tend to preserve their value, even in an economic downturn. Because gold is considered one of the safest defensive assets in existence, its price – and hence the share prices of gold miners – often increases when the prices of most other assets are on the way down. 

This means owning ASX defensive shares can help offset losses elsewhere in your portfolio during a share market correction or bear market.

And the cons?

While there are plenty of benefits to investing in mining stocks, there are also some drawbacks to be aware of.

Can be high risk: Although some mining stocks are considered defensive investments, other mining shares can still be risky. Many junior mining companies, especially those still developing or exploring, should be treated as high-risk, speculative investments.

Complex industry: The mining industry can be complex and challenging to understand. Most mining companies release highly detailed business updates, which might include information on the quality and size of mineral deposits. While this is useful, understanding what it all means often requires a degree in geology! So, make sure you take the time to do plenty of research before deciding which mining shares to invest in – particularly if you are thinking about buying a small cap.

May not suit ethical investors: Mining companies may be damaging the environment. Converting iron ore to steel contributes significantly to global carbon emissions – not to mention the amount created by burning fossil fuels like coal. If this concerns you personally, ensure you are only putting your money towards companies you feel comfortable supporting.

Are ASX mining shares a good investment?

Whether mining shares are right for you will come down to your investing goals, risk appetite, and possibly even your attitude towards climate change. 

It's essential also to remember that mining is a very diverse industry, with many mining shares offering entirely different risk and return characteristics.

In this article, we have looked over the pros and cons of investing in mining shares and identified some of the major mining companies listed on the ASX. 

Hopefully, this brief introduction has given you some information necessary to judge whether mining stocks would add value to your portfolio.