Mining companies across the globe have poor ESG ratings and are a ‘no go’ for many ESG focused investors. Extracting metals and minerals from the earth and processing them for solar, wind and battery applications produces pollution, high greenhouse gas emissions and poor working conditions, particularly in third world countries. However, mining companies play a critical role in the energy transition, and despite their lousy reputation, we think they can be good clean energy investments.
ESG investing is valuable and important, but ESG data is “noisy and unreliable” and organizations like MIT Sloane’s Aggregate Confusion Project are working to create guidelines for investors seeking both financial and social return. Public mining companies like Rio Tinto and Glencore, which are accountable to shareholders, receive higher ESG rankings than unchecked bad actors, yet the sector seems to trade at a discount, suggesting that virtue signaling matters more than valuation to a large cohort of investors. Full disclosure: We own shares in Rio Tinto and Glencore.
Rio Tinto owns and manages a portfolio of iron ore, aluminum, copper, borate, lithium, diamond, and titanium dioxide mines operating in 35 countries. Its stock trades at under 7.5 times 2022 earnings estimates and it has a dividend yield around 9%. Earnings and dividend levels are sensitive to iron ore prices, hence the stock’s nearly 20-point decline as Evergrande, China’s largest property developer, neared default in 2021 (iron ore is key to steelmaking).
In December, RIO installed Dominic Barton, former CEO of McKinsey and Canada’s departing ambassador to China, as Chairman of the Board of Directors. Operations and performance should benefit from the McKinsey affiliation and insights. A recent Barron's article highlighted RIO’s growing lithium business as a possible catalyst for the stock.
Glencore is one of the world’s largest diversified natural resource companies. It is a major producer of copper, cobalt, nickel, zinc, lead, chrome, vanadium, manganese, aluminum, and iron ore. The Economist recently highlighted the company’s controversial, but potentially profitable runoff strategy for its coal assets. Glencore also trades at a value similar to Rio as measured by cash flow. Both companies trade at a sub ten times earnings. By contrast, the S&P 500 trades around 26 times earnings.
We’ve written about how the Clean Energy Transition (CET) is in a different zip code from investing in ESG. Many of the ‘good’ ESG companies are also big consumers of metals and minerals to help fulfill their net zero pledges. Mining companies need a lot of capital, which we believe might be better rewarded and a lower risk investment than many of the high-flying clean tech companies.