The best mining investment picks are well-financed or have a partnership with a major that will help them keep developing. That’s just one of our key tips.

Mining is inherently a politically vulnerable business; you can’t move the mine to another country to escape political trends. In some jurisdictions, local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they usually need the foreign company’s capital and expertise to get any value out of the ground. In developed countries, it can be subject to changing regulatory and environmental constraints.

However, while sometimes risky, mining stocks can be strong performers when commodity prices move up. Here are some of the characteristics of the best mining stocks that investors should look for.

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Here are some characteristics of the best mining investments

When we’re looking at investing in mining companies, we look for well-financed companies with no immediate need to sell shares at low prices. They typically have strong balance sheets with low debt. If they’re junior explorers, we like to see that they have a major partner who can help finance their exploration and development efforts.

However, we avoid any mining companies that trade “over the counter,” where such things as regulatory reporting are lax. And we don’t invest if the stock is trading at an unsustainably high price, because that’s likely the result of broker hype or investor mania.

Instead, we seek an experienced management team with a proven ability to develop and finance a mine. We make sure they’re not in any insecure or politically unstable regions, or in countries with little respect for property rights and the rule of law.

Finally, we look at the market cap of a company’s stock 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 a 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, say, double the stock’s market cap, it provides a margin of safety.

The best mining investment picks already have steady production in place

Some of the best mining investment picks have been producing for years. For the mining component of the resources segment of your portfolio, the focus should be on firms with positive cash flow and high-quality reserves. Resource stocks overall (and this includes oil and gas, of course) should make up only a reasonable portion of a Successful Investor portfolio.

“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. Successful majors have proven methods for exploration and mining, and have consistent output and cash flow, year over year. On the other hand, “juniors” typically have negative cash flow since they’re spending money in hopes of finding a mineable deposit.

When we recommend mining stocks, we want to see positive cash flow, preferably even when commodity prices are low. Even better, we like to see mining companies that have cash flow from an existing mine that is sufficient to cover, or at least contribute to, the cost of developing a second mine.

Could junior mines be one of the best mining investments for high returns?

Many investors have asked us whether they should invest in juniors.

Our answer is that you should always first ensure that your portfolio is spread out across most if not all of the five main economic sectors (Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance, and Utilities). However, junior mines can play a role in the smaller part of your portfolio that you choose to devote to more aggressive investments.

However, even though juniors can have strong profit potential, they entail higher risk than more-established mining companies.

Here is a look at five tips on finding the best junior miners:

1. We want to see experienced management with a proven ability to develop and finance a mine.
2. We look at environmental constraints where the junior miners are looking for minerals. In Europe and certain parts of the U.S., junior miners need a particularly rich find to justify the costs of overcoming environmentalists’ objections.
3. When we recommend junior miners that only explore for minerals, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.
4. We look for well-financed junior miners with no immediate need to sell shares at low prices. The best junior mining firms have a major partner who has agreed to pay for drilling, or other exploration or development, in exchange for an interest in the property.
5. We like mining stocks with strong balance sheets and low debt.

Our three-part Successful Investor strategy helps cut risk—and holds the potential for strong returns

Overall, rather than looking for quicker but riskier returns, we think it’s best to follow our three-part portfolio management philosophy.

• First, invest mainly in well-established, dividend-paying companies.
• Second, avoid or downplay stocks in the broker/media limelight.
• Third, spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities).

Have you lost money investing in junior mines? What did you learn from the experience?