If you have been searching for junior and major mining stocks to buy, learn these tips before investing.
The best mining stocks to buy can generally be broken up into two categories, juniors and majors.
Junior mining stocks are mining companies that are generally new or have been in business for a decade or less. They are usually smaller companies and take on risky mining exploration. Majors have proven methods for exploration and mining, and have consistent output year over year. They typically have been in the mining business for many years and more often than not they operate on a global scale.
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Little-known ways to cut your risk in picking junior mines
When we recommend junior mining stocks that only explore for minerals, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.
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.
When we recommend producing mining stocks, we want to see positive cash flow, preferably even when commodity prices are low.
Focus on stable political regions
We generally stay away from mining companies operating in insecure and politically unstable regions, such as the Congo and Venezuela, or in countries with little respect for property rights and the rule of law such as 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.
Look for steady production
Some of the most highly promoted mining stocks, including gold mining stocks, are penny stocks that have yet to produce an ounce of gold or any 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.
Look for longevity and strength in reserves when considering mining stocks
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.
Seek low production costs and mines that are already producing
Good mining stocks have a range of development projects, but their strong base of low-cost production cuts the risk of relying on new developments alone.
Invest in well-financed mines with strong balance sheets
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. The best mining stocks all have strong balance sheets and low debt.
Avoid buying 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.
Profiting from rare earth stocks
Rare earth stocks should grow over the coming decade. The world’s demand for high-end rechargeable batteries is increasing, and the rare earth refinement process will also become less toxic. This opens up opportunities to mine in more environmentally strict jurisdictions.
Look at the market cap of mining stocks
We look at the market cap of energy 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. We like an energy mining stock’s market cap to be no more than half the value of the mine. We assume that the company will be able to expand its reserves after the mine opens, but if the reserves are double the energy mining stock’s market cap, it provides a margin of safety.
Has this article helped you identify mining stocks to buy for your portfolio? Have you used other methods for selecting mining stocks before? Share your experience with us in the comments.
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