It’s arguably the least sexy sector out there, but given its importance to the global economy I feel like it’s imperative that I get myself up to speed. Through the process, I’ll hopefully be able to help you out as well.
After many interviews with experts, I’ve boiled it down to 5 simple things to look for in a mining stock. Without further ado, let’s get right into it.
1. The Commodity
At the end of the day, you are buying a company that pulls resources out of the ground. Whether it’s Gold for jewelry, Lithium for tesla batteries or Copper for telephone wires…you need to understand what makes the price of that commodity move up and down.
Following thought leaders like fund managers is a great way to get a feel for what commodity they are excited about and why. Every mineral has its own story, and you need to get a feel for it.
As an example, let’s look at the price of gold. Generally speaking, when investors get nervous, they like to buy gold. It’s tangible, you can hold it, it’s not just numbers on a screen, and there’s only so much of it in the world, so it holds value because you can’t just create more out of thin air.
So when things like the coronavirus start spreading, or governments start printing a ton of
2. Stage Of Production
The price of gold is on fire, yet many gold stocks aren’t going up. Why is that? Because many “gold” stocks don’t actually have any gold. They are exploration companies, trying their hardest to prove that the expensive pile of dirt they own has something extremely valuable buried deep beneath it.
If it was easy to find a literal gold mine, we would all be spending our weekends in the forest with pickaxes. But guess what? It’s definitely not easy.
Exploration, development and production are the three stages of developing a mine. Risk goes down as companies progress through the stages, yet so does potential return for investors.
If you own a junior mining exploration stock, and they actually strike gold or whatever resource they’re looking for, the price of your stock will explode. Like I mean explode.
Identify what stage the company is at, and understand how the price of the commodity will actually affect the underlying business.
When it comes to investing in any stock, management is key. This is a big topic, but let’s just focus on two key points; past experience and insider ownership. If key management has guided a company through an acquisition, major discovery or other significant event, then generally speaking they are better prepared to do it again. The contacts they have within the industry, within governments, with financiers is one of the most important factors to success for a mining stock.
And to the next point, the importance of insider ownership really can’t be stressed enough. If management personally owns a large piece of the company, then when the stock falls, they get hit even harder than you do. That means they will do everything possible to make sure that doesn’t happen. Management needs to have major skin in the game to be aligned with the investors.
If the stock price is falling, go check to see if the executives are buying in the market. There is an absolutely horrific website called SEDI that you can use to check insider buying. If they are buying in the market, that can be a good sign they feel the price is undervalued. They may also just be insane, so this is only one tool in the toolbox that we use.
All companies need cash, but where they get their cash can make a big difference. Take a look at the largest shareholders of the mining company, and see if there are any strategic financiers. These could be patient, deep pocketed institutions that can support the company through tough markets, or it could be a more senior mining company that could be a helpful ally down the road.
You may not recognize the names of these institutions initially, but it doesn’t take long to get a feel for them. Let’s say you see the name Sprott show up as a large shareholder. Even just spending 5-10 minutes on their site, you can get a pretty good indication that their investment style is long term company building, which is a good thing.
In the case of an exploration company, getting acquired by a major is the way to cash out on your years of hard work and patience. If a large producer already has a significant investment in a junior company, it could be a good indication of their optimism around the junior companies’ prospects.
Here’s the thing, there is a huge difference between marketing your business and marketing your stock. Investor relations is absolutely key to making sure that your stock price stays stable, or better yet goes up. There are thousands of junior mining stocks that you’ve never heard of, and it’s the job of investor relations to get as many people’s attention as humanely possible.
To do that, they typically launch big marketing campaigns.
As an investor it’s important to read editorial about the company you are researching, but you need to know the difference between actual research and marketing campaigns, and it’s often not easy to tell.
Be careful what conflict of interest the author might have. Publicly traded companies pay media agencies, newsletter writers and digital marketers to draw more awareness to their stock, and hopefully increase trading volume. Just because you see a well written piece of “analysis” doesn’t mean you are off the hook for doing your own research.
At the bottom of any kind of article about a company, look for the disclaimer that describes if the author owns shares or was compensated by the company to say nice things about them. Most likely 9/10 times the author was paid to write that article.
Resource extraction is at the heart of our economy, and we often take it for granted. Every piece of technology that you touch is made possible by the resources found deep in the Earth. Unless you would rather live in the dark, commute via horse, and send messages through a fleet of carrier pigeons, you should recognize that mining is part of your everyday life.
My hope is that this article will give you a basic framework to make mining stocks a little bit more manageable!