Mining stocks are the investments in mining companies. Mining companies search for natural minerals such as uranium, silver, coal, copper and gold. When the economy is expanding, a major part of it depends on distribution of mined materials. This contributes to the numerous benefits of investing in mining stocks. However in order to fully lay hold on these benefits, there are steps you need to follow in maximizing your investment in mines. We will provide you with tips and tricks to maximize your investment in mines.
Categories of Mining Stocks
There are two major categories in which mining stocks can be broken into. These are
- Majors: Majors generally describes companies that have been in the mining business for a long time. They often operate by producing mines on a global scale. Majors have consistent output over the years and have proven methods for exploration.
- Juniors: Juniors are usually smaller companies and they take on risky mining operations and explorations. They may not necessarily have been around for as long as the major companies. If a junior successfully finds a mineable mineral deposit, it can lead to huge returns for investors.
Tips for Investing in Mining Stocks
When it comes to which sector to invest in, it is advised that investors choose investing in mining stocks of well established companies. Although Junior mining stocks have more attractive appeal, it is recommended that investors should cut risks in the volatile resource sector. These well established companies are known to have high quality reserves.
Well Financed Mines
Investors should look for mining stocks that are well financed with no immediate need to sell their shares at a much lower price.
Stable Political Regions
It is recommended to avoid investing in mining companies that are operating in insecure and politically unstable regions. For example the Congo and Venezuela regions. Also avoid investing in countries like Russia or Mongolia, who have little or no respect for property rights and the rule of law. Consider the fact that mining is a politically vulnerable business as it’s impossible for the mine to be moved to another country.
Dividend Yield
Investors should aim for a dividend yield. For example, copper stocks have higher dividend yield than gold stocks. This is because their prices are more stable and demand is more steady. Copper stocks are also usually cheaper than good stocks in relation to their cash flow and earnings. It’s safe to say copper stocks can be less risky than gold stocks.
Reserve Longevity
It is advisable for investors to aim for longevity in reserve. When you invest in mining stock, one of the important things to look out for is how long the company’s reserves are likely to last. If the reserves are low, the stocks need to have consistent success in their exploration in order to get the most out of the mine and the surrounding area.
Choose a Partner
The best Junior mines usually have a major partner who has agreed to cover the cost for drilling and other exploration processes and development activities. This partnership will be in exchange for an interest in the property.
Consider the Market Cap
The market cap of a mining stock should be considered before proceeding with your investment in mines. Sometimes companies drive their stock up too high because of the successful marketing efforts. The stock usually goes way higher in relation to the size of its orebody. For instance, a gold stock market cap should be no more than half the value of the gold itself. This is because it is assumed that the company will be able to expand its ore reserves. However there will be a margin of safety if the mineral reserves are double the mining stock’s market cap.
Choose the Right Location
When picking the right location for your mining stock, you have to consider location. For instance, the High Arctic is an example of a hostile environment for mining stocks to operate. Therefore, the strong mineral showings from extensive drill programs should be considered before investing.
Steady Production
Some of the highly promoted mining stocks are those that are yet to produce an ounce of minerals. A lot of mining companies still invest in mine feasibility studies and do not go into production until enough money is raised. They also need to work on adding more to their reserves.
Stocks with Broad Base Activity
Before investing in a mining stock, you should make sure that they have, at roast, a diversified reserve base. Even if the company has strong reserves, it will pose a greater risk to depend on a single mine production or political stability in any one country. Mining companies can leverage making acquisitions in order to increase their reserves.
Mining Stocks as a Hedge against Inflation
Majority of investors buy mining stocks to have a hedge against inflation- including gold stocks. However most mining stocks also provide an inflation edge. This means they rise directly with material prices and inflations.
Although investing in mining stock is capital-intensive, having a number of quality stocks to your portfolio will be the right move if you are comfortable with some volatility, and also if receiving dividends is equally important for you. We wish you all the best in maximizing your investment in mines and mining stocks.