After a less-than-impressive performance in 2020 due to the onset of COVID-19, several commodity stocks gained momentum in the last year as economies reopened and the rollout of vaccinations gained pace.
But, investing in commodity stocks can be a tricky proposition for those new to the equity market. There are various types of products, including agricultural (crops, lumber, etc.), livestock, metals (gold, silver, copper, etc.), and energy (natural gas, coal, crude oil) that are grown, ranched, mined, or drilled.
Several commodity stocks can be considered cyclical, and the performance of these companies is tied to the health of the economy. For example, energy companies outpace the broader markets when the economy recovers, while lumbar-producing companies benefit from lower interest rates that increase housing demand.
On the other hand, mining companies may have an inverse relationship with the equity market.
When markets turn bearish, investors may look to gain exposure to an alternate asset class such as gold, which is viewed as a store of value. Commodity prices also have an inverse relationship with the U.S. dollar.
Keeping these factors in mind, let’s take a look at the top commodity stocks Canadians can place their bets on right now.
A company valued at a market cap of $51 billion, Nutrien (TSX:NTR)(NYSE:NTR) provides crop inputs, services, and solutions. It offers potash, phosphate, nitrogen, and sulfate products while distributing crop nutrients, crop protection products, seeds, and merchandise products via a retail network of 2,000 locations in the Americas and Australia.
Nutrien stock has more than doubled since the bear market of 2020 and provides investors with a forward yield of 2.6%. In the first nine months of 2021, Nutrien’s adjusted EBITDA rose by 61% year over year to US$4.7 billion, while free cash flow stood at US$2.8 billion.
West Fraser Timber
Another large-cap Canadian stock that you can consider buying is West Fraser Timber (TSX:WFG)(NYSE:WFG). The company is a diversified wood products company that produces and sells lumber, panels, and pulp, and papers in Canada and the U.S.
The company reported sales of US$4.58 billion in 2020, and the top line might grow by 204.5% to US$13.3 billion in 2021.
After adjusting for dividends, WFG stock has returned over 150% to investors in the last five years. Analysts covering the company expect shares to rise by more than 25% in the next 12 months.
One of the largest gold mining companies in the world, Canada’s Barrick Gold (TSX:ABX)(NYSE:GOLD) is focused on maintaining top-tier mining assets. It has the ability to produce over 500,000 ounces of the yellow metal each year with at least 10 years of productive life remaining.
As Barrick Gold operates large mines with substantial resources, it is well poised to produce gold at an enviable pace in the upcoming decade.
A key metric for mining companies is the all-in sustaining costs or AISC, which is the total cost of operations associated with mining a particular metal. Barrick expects AISC to decline from US$1,000 per ounce in 2020 to US$800 per ounce in 2025, which will improve the bottom line significantly if gold prices move higher.
Unlike most other mining companies, Barrick Gold has a strong balance sheet and has lowered its debt balance considerably over time by generating steady cash flows and the sale of non-core assets.
A Canada-based streaming and royalty company, Franco-Nevada (TSX:FNV)(NYSE:FNV) has a diversified portfolio. Its agreements are tied to silver, gold, and platinum group metals in addition to oil and gas as well as iron ore.
The company’s focus on streaming and royalties reduces the overall risk as Franco Nevada does not face rising capital and operating costs. With 325 mining assets that include, Franco-Nevada is valued at a market cap of $32 billion.
Franco-Nevada has managed to increase dividend payments for 14 consecutive years, and its yield currently stands at 0.9%. The stock has also doubled investor returns in the last five years.
Agnico Eagle Mines
The final mining stock on my list is Agnico Eagle Mines (TSX:AEM)(NYSE:AEM) which is all set to merge with Kirkland Gold (TSX:KL)(NYSE:KL). Post the transaction, Agnico will own 54% of the combined entity, making it the highest-quality senior producer with the lowest unit costs, a favorable risk profile, and solid profit margins.
Kirkland reported an AISC of US$740 per ounce in Q3, allowing the company to report a record net income. Kirkland also has no debt on its balance sheet and is cash-flow positive.
Investors looking to gain exposure to uranium can look to buy shares of Cameco (TSX:CCO)(NYSE:CCJ). It is one of the largest uranium miners in the world, and the company reduced supply amid COVID-19 to offset a tepid demand environment.
The uranium industry is at an inflection point after the commodity touched multi-year highs in September 2021. A drastic increase in prices can be attributed to the aggressive purchase of uranium by the Sprott Physical Uranium Trust Fund.
The company ended Q3 with US$1.4 billion in cash and just US$1 billion in debt. Cameco stock rose by 66% in the last year, and its financial flexibility, strong fundamentals as well as wide economic moat makes it a top bet for 2022.
An elemental metal, Lithium is expected to be one of the hottest commodities in the upcoming decade. It’s used to manufacture batteries which is a key component for electric vehicles or EVs.
The demand for EVs is set to grow at an exponential rate going forward, which should positively impact the price of Lithium as it already rose by 400% in 2021.
Valued at a market cap of US$27.6 billion, Albemarle (NYSE:ALB) is the leading manufacturer of lithium and counts Panasonic as one of its largest customers. Shares of Albemarle have risen by 160% in the last five years, and the company has proven itself as a durable mining operator.
It ended Q3 with $595 million in cash and $2.2 billion in debt, which is reasonable. The company generates consistent operating profit margins and is a top bet for long-term commodity investors.
In the first nine months of 2021, Lithium accounted for 39% of total sales and 53% of adjusted EBITDA.
An integrated energy company, Suncor (TSX:SU)(NYSE:SU) is one of the largest organizations in Canada. With operations in the oil sands, Suncor mines bitumen which is then processed to extract oil.
While oil sands are expensive to build, they are cheap to operate. Further, oil sands also have long production lives allowing Suncor to generate cash flows consistently. So, when crude oil prices rise, Suncor’s low-cost operations result in expanding profit margins.
While Suncor cut its dividend payout by 55% in 2020, at the height of the pandemic, it increased quarterly payouts from $0.166 per share in September 2021 to $0.328 in December 2021.
In the last three quarters, Suncor reported net earnings of $2.6 billion, compared to a loss of $4.2 billion in the year-ago period. Further, Suncor also reduced net debt by $3.1 billion, providing it with greater financial flexibility in a volatile macro-environment.
Suncor’s revenue also rose by 51% year over year to $27.9 billion in the first nine months of 2021 on the back of higher oil prices. This meant its operating cash flow stood at a solid $9.1 billion.
Canadian Natural Resources
Another domestic heavyweight, Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) acquires, develops, produces, markets, and sells crude oil, natural gas, and natural gas liquids. Valued at an enterprise value of $78 billion, CNQ stock is up 64% in the last year. Despite its market-beating gains, Canadian Natural Resources provides a forward yield of 4.3%.
In the first three quarters of 2021, CNQ reduced net debt by $5.4 billion and returned $2.4 billion to shareholders through dividends and share buybacks. The company emphasized it continues to maintain strong liquidity that includes revolving bank facilities and a cash balance of $6.2 billion.
Its long-life, low decline assets ensure a sustainable, growing, and predictable dividend. In fact, CNQ has increased dividends at an annual rate of 20% in the last 22 years. It recently raised payouts by 25% year over year.
The final commodity stock on my list Chevron (NYSE:CVX), which has capitalized on rising oil and gas prices that are currently at a multi-year high. A Dividend Aristocrat, Chevron has increased dividends for 34 consecutive years showcasing its resilient balance sheet.
Chevron produces oil and natural gas, and manufactures transportation fuels, petrochemicals as well as lubricants. Its well-diversified business allows the company to support a high dividend yield which is currently at 4.6%.
Chevron’s debt-to-equity multiple is among the lowest in the energy sector at 0.28x, providing it with sufficient liquidity to fund expansion plans and inorganic growth.
The final takeaway
In this article, I have identified market leaders and large-cap companies that are well-positioned to withstand multiple market downturns. However, as is the case with any other investment, these stocks carry significant risks, especially if the ongoing pandemic continues to weigh heavily on the global economy.