Minerals play a crucial, and often overlooked, role in constructing the world around us. All the buildings, and to some extend the technology we use, need materials mined from the earth in order to become a reality. Although most of the public may not know these mining companies exist, knowing they do as an investor can provide you with exciting investment opportunities. However, buyer be where, because investing in mineral stocks present challenges that other stocks don’t.
The performance of a mining company depends on multiple factors; such as the price of what they are mining, feasibility reports, and so many other things. But don’t worry, you won’t have to mine for information yourself. We’ve done all the work for you and created a guide that will tell you all you need to know about investing in mineral stocks.
How To Invest In Mineral Stocks
Mineral stocks are a heterogeneous group. The first thing you’ll want to do is determine what minerals you’re interested in investing in. There are a variety to choose from: gold, palladium, and silver just to name a few. A great place to find information on these minerals is the U.S. Geological Survey. Their they offer detailed reports with summaries on the minerals and their past performance, all of which can be useful in helping you decide which minerals you’d like to potentially invest in. Once you’ve selected a few minerals your interested in, we can move on to the basics of mining stocks.
Obviously, every mining company has to look for mineral deposits. There is no guarantee that a company will stumble upon the mineral they are looking for. This risk of not finding what they’re looking for is known as exploration risk, or assay risk. Even when a company finds a deposit, it doesn’t always mean it is financially feasible to mine it. Sometimes, it will take more money to mine the material than the potential profits that can be made from it.The feasibility report tells a company if it is worth mining for a mineral in the current market conditions.
Now, with the basics out of the way, let’s dig a little deeper….
Majors and Juniors
There are two different groups of mining companies, majors and juniors, which carry entirely different levels of risk and require different methods of analysis.
Let’s start with the majors. The majors are old time players who are well established in the industry and have large scale operations active all across the globe. These guys are well financed and have hundreds of sites being mined. Their established foothold in the industry and their track record make these guys easier to invest in than junior mining stocks. If the price of the commodity being mined falls, majors have the financial resources to keep their claims on deposits and wait for prices to go back up.
In terms of valuing majors, some choose to use discounted free cash flows while others use a market approach and value the company against others in the same industry.
Juniors are smaller and much riskier because they lack the finance resources and track record that a major mining company has. Juniors only have a handful of active mining operations going on at the same time. For this reason, the feasibility report of a certain deposit will significantly move the price of a junior. If the junior manages to find a deposit that is not mineable, the company will have spent a huge chunk of limited resources in finding a mine that is unmineable, and therefore unprofitable. The lack of capital also forces juniors to either pair up with majors to mine a difficult deposit or to sell the rights of the deposit to majors.
Due to their short track record, juniors are tricky to value. Most often, the market assigns them a value of their mineral reserves plus a small premium. Researching management, the political stability of the area where mining is happening, and other things can help you formulate a better value for a junior.
Junior mines are definitely riskier….BUT…..the bigger the RISK the bigger the REWARD!
The Risks of Investing In Mineral Stocks
Although investing in mining stocks has a chance of incredible returns, there’s also a good chance of losing your money if you don’t do your research thoroughly. The risk that most readily comes to people’s mind is exploration risk.
“What if they spend a lot of money exploring and don’t have anything to show for it? ”
This is a valid concern. For majors who have hundreds of claims, the risk of not finding a deposit is mitigated by the fact that they have other explorations going on simultaneously. Finding a sizeable deposit for a junior is extremely important. If they fail to find one and run out of money, they may issue more equity financing and dilute the current investor’s stakes. Worse case, they may even declare bankruptcy.
Another risk to consider is the volatile prices of the commodities. Hundreds of factors affect these commodities and predicting their prices is difficult. If the commodity price tanks, so will the stock price of companies mining that mineral. While majors are able to hold on to their claims for years, juniors do not share the same luxury.
Finally, there are political risks involved. A lot of these deposits are located in developing countries with constant political turmoil. Establishing ownership of a deposit may be difficult and the possibility of regulation changed doesn’t help. Majors have the resources to handle lengthy legal disputes and what not; juniors rarely do.
Popular Mineral Stocks To Look Out For
Now that understand mineral stocks a little better, where should you start looking first? If you’re risk-averse a major mining company such as BHP Billiton (NYSE: BBL) may be a a good option. Headquartered in Melbourne, Australia, this behemoth has been around for a while and offers an attractive dividend yield. If however, you’re hungry for risk, a smaller known junior such as B2Gold (NYSE: BTG) may be a better fit. BTG is a small corporation located out of Vancouver, Canada and with operations in countries like Nicaragua and the Philippines.
Mining stocks aren’t for everyone but if you have the willingness to do thorough research, they can be a great addition to your portfolio. If you’re looking for a stock screener to find great mining companies, check out our article on the 10 best stock screeners.