Topic: Mining Stocks

Here’s what to look for when hunting for the top Canadian mining stocks to invest in

investing in mining stocks

Find major Canadian mining stocks that meet these criteria and you’ll be able to add valuable Resource holdings to your diversified portfolio

Canadian mining stocks can be strong performers when commodity prices move up. Mining is a big part of the global economy: mining companies provide the raw materials that are needed to manufacture countless products, from cars to cell phones, and to build energy, communications and other infrastructure.

However, due to the volatility of these stocks, we recommend that they only form a reasonable part of a well-balanced portfolio.

Find major Canadian mining stocks with these qualities to maximize your portfolio returns

When we’re looking at investing in mining companies, we look for well-financed firms with no immediate need to sell shares at low prices. They typically have stable balance sheets with reasonable 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.

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

Additionally, 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.

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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 top 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.

Cut the risk of your picks so you can more profitably invest in junior Canadian mining stocks

Here are four guidelines we use to pick junior mining stocks we recommend in Power Growth Investor. We’re sure they can help you find the “gems among the rocks” in this fast-changing industry:

  1. 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.
  2. 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.
  3. We think you should avoid penny mining stocks that trade “over the counter,” where such things as regulatory reporting are lax and the market for buying and selling is usually thin. Legitimate companies worth your investment are seeking to leave the over-the-counter market as soon as possible.
  4. We avoid junior mining stocks that trade at unsustainably high prices because of broker hype or investor mania. Instead, we focus on reasonably priced mining stocks with favourable geology.

We believe most investors should remain invested in Canadian mining stocks. For one thing, they have a history of rising with inflation. Thus they play a crucial role in your portfolio as a hedge against inflation. If inflation rises significantly over the coming years, mining stocks would be among the most valuable investments in your portfolio. And when the economy rises, the best mining stocks will reward investors with substantial gains, and, in many cases, dividends.

Bonus tip: Follow our three-part Successful Investor strategy to make safer stock picks

  1. Invest mainly in well-established, dividend-paying companies;
  2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  3. Downplay or avoid stocks in the broker/media limelight.

What do you think is the best approach to making a profit in Canadian mining stocks? Or do you avoid them altogether?


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