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Natural Resources: Constant Demand with a Serious Moat

30 March 2017 in Trading Ideas

On the road to Leadville, Colorado, millions of people drive by the Climax mine, which straddles both Summit and Lake Counties in one of the most picturesque areas of the United States. While few people realize it, at one point this mine provided around 75% of the world’s supply of molybdenum, a rare naturally occurring metal that is used to create super strong structural steel, among other uses.

While you could drive by this mine without a second thought, a little ingenuity and a few moments online show that the Climax mine is owned by Freeport-McMoRan, a diverse mining company with operations in North America, South America, Europe, and Indonesia. This public company is just one of dozens of options to invest in natural resources. Natural resource production and industries have proved for decades to be a solid investment option. If you are looking to add some tried and true investments to your portfolio, you don’t have to look for long to find a great option in natural resource production.

Natural Resources are in Constant Demand
Everywhere you look, natural resources are involved. Concrete, asphalt, steel, plastic, and wood all come from natural sources. Concrete and asphalt require mined rock, sand, and mineral content. Steel requires mined metals, including in some cases the previously mentioned metal, molybdenum. Plastic, like the gas in nearly every car and truck on the road, requires petroleum.

These resources may come from far away locations around the world, but the industry and effort required to extract and transport these raw materials is big business. While the demand for natural resources is highest in strong economic conditions, there is a constant base level demand for these goods in all seasons and economic conditions. In other words, these companies are not going anywhere anytime soon.

New Companies Struggle to Break into the Industry
There are many competitors in the natural resources production industry, but new companies rarely break into this area with big market share and success. Resource production is highly capital intensive and requires meeting various government regulations in multiple parts of the world. Starting and building a new resource production company is very expensive, which protects current industry leaders with what is known as an “economic moat.”

In layman’s terms, an economic moat is a financial constraint that prevents competitors from entering an industry. T-shirt production, for example, has a very small economic moat as anyone with a few thousand dollars can buy t-shirt printing supplies and materials. Starting a new mine, oil company, or other resource extraction business, on the other hand, often requires tens of millions of dollars for even the smallest operation. Industry titans like Newmont Mining and ExxonMobil have billions invested in their operations. Even with major improvements of technology, these capital-intensive businesses do see many new competitors emerge.

President Trump’s Infrastructure Plans Could Lead to Additional Demand
In addition to their regular economic advantage, raw materials and natural resource producers may have a flurry of activity in the coming years if President Trump’s promise for infrastructure improvements comes to fruition. The President has laid out the groundwork for a plan of over $1 trillion in infrastructure improvements, and natural resource companies are destined to get a share of the profits.

If the nation starts rebuilding roads, airports, bridges, and high-speed rail lines, these all require natural materials for construction. The tractors, cranes, excavators, loaders and other construction equipment require diesel. Implementing such a broad infrastructure plan will have a vast, positive effect on all related industries.

Getting Started Investing in Natural Resources
When investing in natural resource production companies, investors have the option to choose between many different public company stocks. However, there are options to achieve better diversification instantly when purchasing through Motif. Here are a few  Motifs that include investments in resource and infrastructure businesses:

Precious Metals – The Precious Metals Motif is focused primarily on gold and silver production. Companies included are spread around the world and include diverse mining and extraction companies.

Dr. Copper – This Motif is focused on copper mining, but includes companies like Barrick Gold and previously mentioned Newmont Mining and Freeport-McMoRan that also mine for gold and other rare and precious metals used for jeweler, industrial, and high-tech processes.

Home Improvement – The Home Improvement Motif is focused more on consumer sellers of home improvement materials, like Lumber Liquidators and Home Depot which sell lumber and other building materials.

Black Gold – Oil and gas are key to other resource producers and virtually every consumer in their daily life. Oil and gas companies are very complex and include exploring, drilling, extraction, processing, distribution, sales, and everything in between. This Motif touches virtually every piece of the industry within companies including Chevron, ConocoPhillips, Noble Energy, Schlumberger, and Precision Drilling Corporation.

However you decide to invest in natural resource production, it is a solid and strong industry. While stock prices can be volatile and follow commodity prices in some instances, the steady demand and strong economic moat make these stocks a sure bet for many years to come.

Investments in commodity-related products, such as precious metals, agricultural products, and oil may be subject to greater volatility and liquidity risks than investments in traditional securities. Commodity-related products can be significantly impacted by underlying commodity prices, world events, government regulations, and economic conditions, which can dramatically affect the value of an investment.

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