This commodity rule no longer applies: Barrick Gold, BHP Group, Globex Mining

BHP Group and Barrick Gold: High cash flows, but risks remain

The commodity industry is diverse. Most readers will associate this sector with the mining of gold, silver, copper, or other raw materials. The two industry giants, BHP Group and Barrick Gold, have been successful in this field. While BHP has achieved a market capitalization of just over EUR 100 billion through the mining of industrial metals around the world, Barrick Gold, with a market capitalization of around EUR 46 billion, is considered the world's best-known gold producer. Both companies have in common that they invest early in promising projects, bring them into production, and then generate revenue through the sale of raw materials. Since raw material projects are a very long-term business (it often takes ten years to develop a mine before it reaches production), BHP Billiton and Barrick Gold have flexibility in planning their operations. In addition, the sale of raw materials provides a steady stream of revenue, making both companies largely independent of external sources of financing**.

Both the BHP Group and Barrick Gold pursue shareholder-friendly policies, including occasional share buybacks and stable dividends. This has made the shares attractive to long-term investors – many investors reflexively bet on the big players when it comes to investing in commodities and parking capital in a crisis-proof manner. But are the business models of Barrick Gold and BHP Group really crisis-proof? Is the old credo that large commodity multinationals are good crisis stocks still valid today?

Giga-projects in unstable regions – Is that really safe?

The fact that large mining companies generate steady cash flows and are broadly diversified in various ways are likely the most important arguments in favor of stocks such as BHP or Barrick Gold. However, regional focus also presents a risk. Both BHP Group and Barrick Gold are increasingly active in emerging regions that are sometimes politically or administratively unstable. Examples include production sites in Africa, Asia, and South America. These regions are often home to massive projects, such as Barrick's Reko Diq copper project in Pakistan or BHP's investments in Botswana and Chile. Such projects require significant initial investments and play a decisive role in the strategic planning of the mining giants. However, if production losses occur, profit warnings are not far behind – bringing with it all the associated risks for investors.

Globex Mining is developing more than 250 projects in North America with partners

Globex Mining offers another option for investing in commodities in a broadly diversified manner other than through shares in large mining companies. The Canadian company operates as a kind of holding or royalty company and secures promising mining projects at an early stage. Its portfolio currently includes more than 250 commodity projects. All properties are located in North America. Globex thus has a regional focus and concentrates on a region with maximum legal certainty and stability. The projects offer almost all elements, from gold and silver to copper, nickel, zinc, rare earths, manganese, and lithium. After acquiring a property, Globex conducts minimal exploration work if necessary and then searches for suitable partner companies. These partners can then further develop the properties at their own expense and, in return, grant Globex Mining licensing fees, known as royalties. One-time payments or profit sharing are also possible contract details. In this way, Globex Mining reduces its own risk and generates a steady income.

License payments as an important pillar of financing

During last year's PDAC mining conference, Globex CEO Jack Stoch explained that this approach had already succeeded in multiplying an investment of CAD 2 million, ultimately generating CAD 15 million. Although Globex Mining does not have the cash flows of BHP Group or Barrick Gold to pay for exploration programs out of pocket, the large number of projects and regular license payments provide greater financial flexibility than small exploration companies, which often only really push ahead with one flagship project.

According to BloombergNEF, around USD 2.1 trillion in new mining investments will be needed by 2050 to avoid already foreseeable supply shortages and meet the raw materials demands of a climate-neutral world. If these investments are not made, raw material shortages could delay the energy transition and drive up costs - including those related to the consequences of climate change. While mining giants commit early to massive projects and develop them with high capital expenditures, Globex takes a different approach: projects are only advanced in collaboration with partners. This reduces risk and enables unparalleled project diversification. Globex's focus on North America also largely eliminates country-specific risk.

Is Globex Mining better suited to the spirit of the times?

Globex Mining's share price rose by almost 30% to USD 1.00 over a six-month period. BHP and Barrick Gold fell by 10.2% and 0.3%, respectively, over the same period. In light of this development, commodity investors should also consider investments off the beaten track. Globex Mining is worth considering due to its innovative and low-risk business model coupled with its low market capitalization of only around EUR 50 million. In a world where long-term planning is increasingly becoming obsolete, Globex Mining offers a reliable business model. The stock is, therefore, in tune with the spirit of the times.