Markets & Investors

20 Tips For Successful Investing in Mining Stocks

Considerable Profits Can Be Made By Investing In Mining Stocks—But You Need To Follow These 20 Tips

We think most investors should consider investing in mining stocks as part of a diversified portfolio.

Mining stocks are investments in companies that produce or explore for minerals, such as uranium, coal, molybdenum (which is used in steelmaking), copper, silver and gold.

Mining stocks can generally be broken up into two categories, majors and juniors. Majors are typically mining companies that have been in the mining business for many years and more often than not they operate producing mines on a global scale. Majors have proven methods for exploration and mining, and have consistent output year over year.

Junior mining stocks are usually smaller companies and take on risky mining exploration. If a junior mining stock is successful at finding a mineable mineral deposit, it can mean huge returns for investors.

While junior mining stocks may offer some speculative appeal, we continue to recommend that you cut your risk in the volatile resource sector by investing in mining stocks of well-established mining companies with high-quality reserves. However, resource stocks (and this includes oil and gas, of course) should make up only a limited portion of your portfolio—say less than 20% for a conservative investor or as 30% for an aggressive investor.

20 tips for investing in mining stocks

  1. Focus on stable political regions: We generally stay away from mining companies operating in insecure and politically unstable regions like the Congo and Venezuela, or in countries with little respect for property rights and the rule of law, like Russia or Mongolia. Mining is inherently a politically vulnerable business; you can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they need the foreign company’s capital and expertise to get any value out of the ground.
  2. Invest in mining stocks as a hedge against inflation: Many investors buy mining stocks, including gold stocks, as a hedge against inflation, and some mining stocks pay dividends. But most mining stocks also offer an inflation hedge—they rise along with commodity prices and inflation.
  3. Aim for a dividend yield: Copper stocks generally have higher dividend yields than gold stocks because they have steadier demand and more stable prices. As well, they’re usually much cheaper than gold stocks in relation to their earnings and cash flow. That means they potentially have less room to fall if markets in general fall. That’s also another way of saying that they can be less risky than gold.
  4. Consider investing in mining ETFs—especially for gold and silver: Gold and silver could well regain their highs and move up even further over the longer term, although they will likely remain volatile. Higher prices would arise from investor fears that inflation or global political and economic instability will hurt key currencies, such as the euro or the U.S. dollar. If you want to hold a number of gold or silver stocks, many exchange traded funds offer top-quality global miners and low fees.
  5. Look for longevity in reserves: When you invest in any resource stock, gold included, you need to look at how long the company’s reserves are likely to last. Those with low reserves need to have consistent success in their exploration programs to maximize the production of the mine and the surrounding area. That success is far from guaranteed.
  6. Invest in stocks with a broad base of operations: Even if the company has strong reserves, the best mining stocks with the least risk also have a diversified reserve base. That way they are not dependent on a single mine’s production or political stability in any one country. Mining companies can also increase their reserves by making acquisitions—with mineral prices down from their record highs, you may see an increase in mining company acquisitions at distressed prices.
  7. Look into steady production: Some of the most highly promoted mining stocks, including gold mining stocks, are penny stocks which have yet to produce an ounce of gold or other minerals. Many must still add to their reserves, invest in mine-feasibility studies, and raise a lot of money before they go into production. The prospects for most of these penny-mine properties, even though they may be in areas with production from existing mines nearby, are far from certain.
  8. Seek strong reserves, low production costs and mines that are already producing: Good mining stocks have a range of development projects, but their strong base of production cuts the risk of relying on new developments alone.
  9. Focus on established areas: When we recommend mining stocks, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.
  10. Think like an environmentalist: We look at environmental constraints where juniors are looking for minerals. In Europe and certain parts of the U.S, they need a particularly rich find to justify the costs of overcoming environmentalists’ objections.
  11. Invest in well-financed mines: We look for well-financed mining stocks with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests. The best junior miners have a major partner who has agreed to pay for the drilling or other exploration or development, in exchange for an interest in the property.
  12. Look for strong balance sheets: The best mining stocks all have strong balance sheets and low debt.
  13. Pick the right location: We want to see favourable factors, like strong mineral showings from extensive drill programs, before we recommend investing in mining stocks that operate in hostile environments, like the high Arctic.
  14. Avoid hype: We avoid investing in mining stocks that trade at unsustainably high prices due to broker hype or investor mania about the underlying commodity (such as gold). Instead, we focus on reasonably priced mining stocks with favourable geology.
  15. Look at the market cap: We always look at the market cap of gold mining stocks versus the estimated value of the mineral resource they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of its ore body. For example, we like a gold stock’s market cap to be no more than half the value of the gold. We assume that the company will be able to expand its ore reserves after the mine opens, but if the mineral reserves are double the gold mining stock’s market cap, it provides a margin of safety.
  16. Seek high average daily trading volume: This is one positive factor to look for when picking junior mining stocks. The more actively traded junior mines are, the more liquid they are, which makes them easier to dispose of when it’s time to take profits.
  17. Avoid mining stocks that trade at unsustainably high prices: This is usually due to broker hype or investor mania about the underlying commodity (such as gold). Instead, we focus on reasonably priced mining stocks with favourable geology.
  18. Identify a partner: The best junior mines have a major partner who has agreed to pay for the drilling or other exploration or development, in exchange for an interest in the property.
  19. Think twice about gold bullion: Gold bullion investments have hidden costs that dramatically eat into your earnings potential over time. Gold bullion and gold coins require insurance and special storage plans which will incur costs for as long as you keep them.
  20. Invest in gold stocks instead of bullion: Invest in gold through gold-mining stocks. Unlike bullion, these stocks at least have the potential to generate income. High-quality gold stocks can pay off nicely by establishing new mines and raising their production, even if gold goes sideways for a lengthy period. But keep in mind that no matter how appealing they look, you should limit gold stocks to a modest part of your portfolio.

Although investing in mining stocks can be highly volatile, they often make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute—they have grown at higher-than-average rates within the mining industry, or within the market as a whole, for years or decades.

Do you have a process when you’re investing in mining stocks that you’d like to share? What else would you add to this list? Share your experience with us in the comments.

A Beginner's Guide To Mining Stocks

If it isn't grown, it has to be mined. You've probably heard some variation of this saying. It is used by people concerned about the environmental effects of mineral depletion as well as people bullish on mining stocks. Although these two groups have a very different emphasis when they speak it, they are both right - mining is big business. Almost every commercial product has elements that started off buried beneath the earth. Here are a few things that you should know before adding mining stocks to your portfolio.

Two Stocks, One Sector
Mining stocks are truly two distinct groups: majors and juniors. The majors are well-capitalized companies with decades of history, world-spanning operations and a slow and steady cash flow. Major mining companies are no different from large oil companies, and many of the same metrics apply with a mining twist. Both have proven and probable reserves, except mining companies break down profit and cost on a given deposit by ton, instead of barrel. In short, a mining major is easy to evaluate and easy to invest in.

The junior mining stocks are very nearly the exact opposite of mining majors. They tend to have little capital, short histories and high hopes for huge returns in the future. For the juniors, there are really three fates. The most common is failure, which leaves a hole in everyone's pocket, including that of the banks and investors. The second fate occurs when a junior has enough success to justify a major paying a decent premium to gobble it up, leading to decent returns all around. In the third and most rare fate, a junior finds a large deposit of a mineral that the market wants a lot of; it is a magical combination of the right deposit at the right time. When this happens, juniors can return more in a few days than a major will return in years.

Valuing Major and Junior Mining Stocks
Although majors and juniors are very different, they are united by the one fact that makes all mining stocks unique: their business model is based on using up all the assets they have in the ground. The catch is that mining companies don't know exactly how much is in a given deposit until it is all dug up. Therefore, the value of mining stock roughly follows the market value of its reserves, with a premium paid to companies with a long history of successfully bringing those reserves to market.

Reserves are evaluated through feasibility studies. These studies independently verify the worth of a deposit. A feasibility study takes the estimated size and grade of the deposit and balances it against the costs and difficulties of extracting it all. If the deposit will fetch more money on the market than it costs to dig up, then it is feasible.

Different Risks, Different Rewards
If a mining major has hundreds of deposits staked and/or being mined, the contents of any single deposit aren't likely to shake the stock value too much. A major is the sum of all the deposits with the aforementioned goodwill tied to history. A change in the market value of a mineral that makes up a larger percentage of the deposits will have a much larger effect than a new deposit or a failed deposit. A junior mining stock lives or dies on the results of its feasibility studies.

A junior mining stock sees the most action leading up to, and immediately after, a feasibility study. If the study is positive, then the value of the company may shoot up. The opposite, of course, is also true. Often, a junior miner won't mine a feasible deposit to the end. Instead, they sell the deposit (or themselves) to a larger miner and move on to search for another one. In this sense, junior mining stocks form an exploration pipeline that feeds the major miners in the end. In this view, the big risks and rewards mostly reside at the junior mining level.

Choosing Between Majors and Juniors
As an aspiring mining investor, you're probably wondering whether you should invest in junior mining stocks or major mining stocks. The answer depends on what you are looking for. Juniors have the potential to offer a lot of appreciation in the right market. This makes them an ideal destination for risk capital, but hardly the best place to put your social security checks. If you are looking for a lower-risk stock with the potential for dividends and some decent appreciation, then major mining stocks may be for you.

The Bottom Line
This is a primer and as such, suffers from being overly broad and simplistic. Before you invest in the mining sector, you should probably know what greenfields exploration is, how to estimate the impact of pricing risk and be able to hold forth on the dangers of buying on a single positive assay. If you are keen enough on mining to do some research, then there is probably room in your portfolio for both mining majors and juniors.

Read more: A Beginner's Guide To Mining Stocks
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