Investing in mining has been a bumpy ride, but I’m digging in deep

Can you imagine a modern economy without motor cars, planes, trains or skyscrapers? No, me neither.
That’s why, while most financial media focus on the new iPhones that Apple will reveal on Tuesday, I have been investing at the opposite end of the technology spectrum. Not so much digital developments online as digging deep in the red dirt for iron ore, which is essential to forge the steel that makes so much of the world around us.
BHP Holdings (stock market ticker BHP) is the biggest miner on the planet, with iron ore delivering nearly half its revenues. It got rid of its oil and liquefied natural gas interests a couple of years ago, partly to fund a potash fertiliser mine in Canada that it is hoped will begin production in late 2026.
BHP used to deliver more dividend income to shareholders than anyone else on the FTSE 100 index of Britain’s biggest companies. Then talk of windfall taxes prompted it to leave London in January 2022, causing tracker funds that follow the Footsie to shun the stock.
Contrariwise, this active investor took the view that moving its main stock market listing to Sydney made no difference to the underlying business. This includes being the world’s second-biggest producer of copper, after Freeport-McMoRan. The conductive metal is essential for electrification and generates more than a quarter of BHP’s revenues.
So, having been a BHP shareholder for more than a decade and transferring the stock from a paper-based broker at £19.07 in September, 2013, I remained onboard. Since then, it’s been a bumpy ride, to say the least.
Worst of all was the Samarco disaster, a Brazilian dam failure in 2015 that caused at least 19 deaths and unprecedented pollution. Litigation continues with BHP and its partner Vale offering £19.6 billion compensation in April.
No wonder the shares lingered in a dark place at £20.50 last Monday, at which point I bought some more. A crystal ball might have helped because subsequent stock market gloom pushed the price down to £19.48 on Friday.
More positively, BHP yields 5.6 per cent dividend income after increasing payouts by an annual average of 7.6 per cent over the past five years, according to the independent statisticians London Stock Exchange Group.
It is important to beware that dividends are not guaranteed and can be cut or cancelled without notice. However, if the present rate of growth in payouts can be sustained, shareholders’ income would double in less than a decade.
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While there is nothing this company can do about the price that commodities fetch, it is succeeding in boosting supply and squeezing costs. Last month its chief executive, Mike Henry, said that in the past financial year it, “delivered record volumes in Western Australia, where we extended our lead as the world’s lowest-cost iron ore producer. Across our global copper assets, we grew overall volumes 9 per cent for the second consecutive year and expect to deliver a further 4 per cent in this financial year.”
Against all that, mining remains a cyclical and risky business. BHP’s share price has made negligible progress for more than a decade; it briefly traded above its present level in 2010.
An alternative way of looking at this dismal history is that the shares might prove cheap today. They are priced at 17 times corporate earnings, with a net profit margin of 16 per cent and a return on investment of 12 per cent.
As someone who prefers to invest in businesses that seek to make the economy more sustainable, Henry’s strategy of moving towards “future-facing” commodities also appeals. Electric vehicles can require three times as much copper as those with internal combustion engines. Massive amounts of potash fertiliser are needed to feed the global population, estimated at 8.2 billion people.
Most immediately, the shares are due to trade ex-dividend from Thursday, September 12, which means buyers that day or later will not get the next income payment, due on October 3. There are usually two distributions each year and these are worth a handy four-figure tax-free sum to me, because I hold these shares in my Isa.
Recent dividend payments helped to fund Monday’s purchase and, despite last week’s stock market storms, BHP remains my ninth-most valuable holding. Incoming cash came from the self-descriptive investment trusts Ecofin Global Utilities and Infrastructure (EGL) and Greencoat UK Wind (UKW), which yield 4.4 per cent and 7 per cent, respectively, rising 4 per cent and 8.1 per cent a year.
Not one of this high-yield trio has delivered anything like the total returns generated by Apple (APPL), which remains my most valuable holding, or Microsoft (MSFT), which ranks tenth by value. But the main aim of my portfolio these days is to generate sufficient income to fund an enjoyable retirement, which I hope to do primarily from dividends.
While it would be easy to buy more Apple or Microsoft shares, neither yield much income. They pay 0.4 per cent and 0.7 per cent, respectively, going up 6.7 per cent and 10.2 per cent a year.
So, leaning heavily on the likely long-term demand for BHP’s hard commodities, with which this column began, I have gone against the trend and topped-up my out-of-favour yielder. I can’t always be right, but I can always be different.
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Agricultural products, sometimes called soft commodities, are another sector where demand looks dependable, if cyclical, but share-price volatility can still shock. Archer Daniels Midland (ADM), which trades in a wide variety of foods from corn and wheat to linseed and peanuts, delivered a brutal reminder about these risks last January.
That’s when it sent shareholders a Sunday night email reporting the appointment of a new chief financial officer because the previous incumbent had been placed on “administrative leave, effective immediately”. It also disclosed: “an investigation regarding certain accounting practices with respect to ADM’s Nutrition segment in response to a request by the Securities and Exchange Commission ”.
Mr Market was not impressed and marked the shares down 24 per cent that Monday, ADM’s worst slump since the beginning of the Great Depression in 1929. This was a bit of a blow for me, because ADM was a top ten holding.
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But, as reported here at that time, Nutrition generated only 7 per cent of ADM’s revenues and I suspected that the market might be over-reacting. So I sold some McDonald’s shares to raise a low five-figure sum which I invested in ADM at $53 per share.
Since then, they have perked up to trade at $59 on Friday ex-dividend, making them my eighth-most valuable holding. They have raised dividends every year for half a century and continue to yield 3.3 per cent income.
The Securities and Exchange Commission probe remains a cloud of uncertainty hanging over this business. But at least those “accounting practices” didn’t turn out to be a double-entry book-keeping disaster. What’s that? On the left there is nothing right, and on the right there is nothing left.
Full disclosure: Ian Cowie’s shareholdings