Commodity prices have been a major driver for the share price performance of our miners and the nearer-term earnings outlook for the sector is among the brightest on the ASX.
But volatile mineral prices are only good for driving near-term share price performance of mining stocks. To determine the longer-term winners in the sector, UBS has developed a system to identify the best big diversified miner that can deliver sustainable growth for years to come.
Local investors will be pleased to know that Rio Tinto Limited (ASX: RIO) has come out tops when compared to its global peers as the stock has scored the highest number of points on the broker's "structural risk scorecard".
"We believe other SRI-type [socially responsible investing] factors underpin sustainable performance long-term and these are important for an extractive industry with a track record of poor capital allocation often operating in challenging jurisdictions," said UBS.
This scorecard measures miners on four key metrics. The first is Business Risk, which looks at regional exposure, commodity diversification, balance sheet, and operating leverage.
The second is Safety with the broker looking at the rates of fatality and lost time injury over the past five years; while the third is Reliance that includes issues such as reserve replacement and reserve life, tax paid and community investment as a percentage of pre-tax profit.
Last is Governance, which analyses board experience and diversity, management remuneration and equity ownership, as well as impairments and total shareholders over the last five years.
Rio Tinto may have been ranked the highest on these metrics with a score of 43, but it isn't the only ASX miner that is a standout.
BHP Billiton Limited (ASX: BHP) also scored strongly with 41 points as it lost marks on the Reliance measure due to its petroleum division, which has experienced a sharp fall in reserves. Nonetheless, both Rio and BHP have outperformed Glencore and Anglo American, according to UBS.
I am already overweight on both miners and it isn't only due to the outlook for key commodities. The miners have strong balance sheets that would make the big banks blush and are flushed with cash that will enable them to undertake more capital returns this year (and possibly next).
Let's just hope a full-scale trade war between the US and China doesn't break out as that will change my outlook for the sector given that miners can't escape being in the firing line.
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