What is the mining industry?
If it does not grow, it must be mined. You may have heard some variations of this sentence. People who are concerned about the environmental impact of mineral depletion and those who are optimistic about mining stocks are using it. Although the two groups speak very different priorities, they are both right-mining is a big business. Almost every commercial product has elements that start to be buried underground.
Before adding mining stocks to your portfolio, you should understand the following things.
- The mining industry is popular with investors because it produces stable old metals and industrial metals and other raw materials.
- Investors divide the industry into two major categories: professional and junior.
- The primary ones are higher-risk companies, most likely to appear in the exploration of commodities such as oil, minerals, and natural gas.
- Large oil companies are less volatile and more mature, with large debt portfolios and capital buffers used to fund further exploration.
- Mining companies face a variety of unique risks, including commodity price fluctuations, geopolitical factors where the mines are located, and finding lucrative geological areas for claims.
Two groups, one department
Mining stocks are indeed two distinct groups: professional and junior.
Large companies are well-capitalized companies with decades of history, global operations, and slow and steady cash flow. Large mining companies are no different from large oil companies, and many of the same indicators apply to the mining industry. Both have been proven, and possible reserves (except for mining companies) break down the profit and cost of a given deposit by tons rather than barrels. In short, the mining profession is easy to evaluate and easy to invest in.
Junior mining stocks are almost the exact opposite of mining specialty stocks. They often have little funds, short history, and high hopes for huge returns in the future. A junior company is essentially a smaller or newer company that is developing or seeking to develop natural resource deposits or oil fields.
For juniors, there are three possible destinies.
- The most common is failure, which leaves a hole in everyone’s pocket, including the pockets of banks and investors.
- The second fate occurs when a junior has enough success to prove that a major pays a substantial premium to swallow it, resulting in a comprehensive and substantial return.
- In the third and rarest fate, a junior man discovered a large deposit of minerals that the market wanted a lot-this was a magical combination of the right deposits at the right time. When this happens, juniors return more in a few days than majors return in a few years.
Valuation of major and minor mining stocks
Although large companies and small companies are quite different, they are united by the fact that all mining stocks are unique: their business model is based on exhausting all their assets underground. The problem is that the mining company doesn’t know how much there is in a given deposit until all of it is unearthed. Therefore, the value of mining stocks roughly follows the market value of their reserves, paying a premium to companies with a long history of successfully bringing these reserves to the market.
Reserves are evaluated through feasibility studies. These studies independently verified the value of deposits. The feasibility study will estimate the size and grade of the deposit and balance it with the mining cost and difficulty. If deposits can make more money in the market than the cost of mining, then this is feasible.
Different risks, different returns
If a mining giant has hundreds of deposits mortgaged or mined, the content of any single deposit is unlikely to shake the value of the stock too much. Mainly the sum of all deposits with the aforementioned goodwill. Changes in the market value of minerals that account for a larger proportion of deposits will have a greater impact than new or failed deposits. The life and death of junior mining stocks depends on the results of their feasibility studies.
Junior mining stocks usually take the most action before and immediately after the feasibility study. If the results of the research are positive, then the value of the company may soar. Of course, the reverse is also true. Normally, junior miners will not mine viable deposits to the end. Instead, they sell their deposits (or themselves) to a larger miner and then continue to look for another one. In this sense, junior mining stocks formed an exploration pipeline that ultimately provided food for major miners. In this case, the greater risks and rewards mainly exist in the primary mining layer.
Choose how to invest
As an aspiring mining investor, you may be wondering whether you should invest in junior mining stocks or major mining stocks. The answer depends on what you are looking for. Young people have the potential to provide substantial appreciation opportunities in suitable markets. This makes them ideal destinations for venture capital, but they are not the best place for social security inspections. If you are looking for low-risk stocks with dividend potential and considerable appreciation potential, then the major mining stocks may be for you.
This is an introductory book, so it is too broad and simplistic. Before you invest in the mining industry, you probably should know what greenfield exploration is and how to estimate the impact of pricing risk, and be able to predict the risk of purchase in a single positive analysis.
If you have enough interest in mining to do some research, then you may have mining professional and junior space in your portfolio. For those who prefer to invest in the larger mining sector (rather than picking individual stocks), there are several mining-related ETFs and mutual funds that can be added to your portfolio.