What is the company’s market capitalisation? Is it a small-cap, mid-cap or large-cap company? What is the fully diluted market cap, including any options or performance shares that may come into play in the near term or are already ‘in the money’? As these are exercised, it is likely that there will be pressure on the sell side of a stock.
Investing in mining can be a lucrative experience.
However, it is also fraught with danger.
If you don’t know what to look for in a mining company, your entry into the sector could be disastrous.
In this article:
In the following guide to investing in mining, we’ll break down the difference between junior and major mining companies, the advantages and disadvantages of investing in the sector, how to recognise a potential growth stock and the risks of investing.
What is mining?
Love it or hate, mining is crucial to social evolution.
While there is no doubt, the industry must undergo a major step-change to clean up its act, it isn’t going away any time soon.
Think about it.
Cleaning and greening the environment and the move to technologies that can help us live more sustainable lives, still requires minerals and metals to be mined.
Graphite, magnesium, lithium, copper, nickel and more are required to build electric vehicles and other low emitting technologies.
Mined materials are used to construct roads and hospitals.
Those materials help to build the computers that you type on and generate the electricity that flows through your house.
They are responsible for medical technologies that may one day save your life, which makes them invaluable despite the value we put on them.
So, what is mining?
It is the extraction of metals and minerals from the earth. There are five stages in the mining lifecycle (which we will look at in more depth in another article):
- Exploration
- Discovery
- Development
- Production
- Reclamation
Simple, right?
Where it gets complicated is in what those materials are used for and how they are extracted, what type of company is mining them: producer or explorer and where they are being mined.
All of those questions, when asked and answered can have a material effect on a share price.
We’ll get to that shortly.
In the meantime, let’s look at the different types of miners.
Majors vs mid-tiers vs minors
Mining stocks are generally divided into three categories: majors, mid-tiers and juniors.
The juniors
Small explorers that can be risky to invest in. They are typically low capital exploration companies looking for new deposits of natural resources and involved with the development and permitting of a mine.
Producing up to 300,000 ounces/year of a resource would be seen as a good result. Anything over that amount and they are moving into a ‘mid-tier ‘or ‘major’ company.
They are considered growth stocks and are early stage, with the potential to make a discovery, whether it be gold, silver, lithium, magnesium etc …
If you are looking to diversify your portfolio, these are your high risk, high return stocks. Best to invest in a few and spread the risk, rather than putting all your potatoes into just one sack.
Junior is defined by the following:
- Market cap: less than $500 million
- In the exploration and development phase
- Production of less than 300,000ounces/year
- High-risk but high reward (if successful)
- Takeover targets (if successful)
The juniors are at the bottom of the rung, with the potential to grow and include Cauldron Energy Ltd (ASX:CXU), Core Lithium Ltd (ASX:CXO), Sunstone Metals Ltd (ASX:STM) and Meteoric Resources NL (ASX:MEI).
The mid-tiers
If a company has outgrown its junior status but isn’t big enough to be a major it will generally fit into the mid-tier category.
We can define mid-tier companies by the following:
- Market cap: less than US$1 billion
- Annual revenue: US$50 million to $500 million
- Diversification: are developing more than one asset and mineral
- In the development and production stage
These companies carry significantly less risk than juniors.
The majors
Tend to operate producing mines, with proven methods of mining, consistent output and a global footprint.
They tend to have:
- Market cap: more than US$1 billion
- Revenue: more than $500 million/year (with stable cash flow)
- Financial stability: are well funded to produce and develop
- Diversification: Multi-asset, multi-commodity
The majors are your top-line players. Think BHP Group PLC (LSE:BHP), Rio Tinto PLC (LSE:RIO) and Glencore PLC (LSE:GLEN).
Investing in mining companies
Before investing in mining companies you should do your due diligence, seek financial advice and determine what types of companies (or resources) you would like to invest in.
It’s good to have a checklist when making your investment decision.
The following information should be ticked off before you make your decision. Here are 20 things you should look out for:
- What is the company’s market capitalisation? Is it a small cap, mid-cap or large-cap company? What is the fully diluted market cap, including any options or performance shares that may come into play in the near term or are already ‘in the money’?. As these are exercised, it is likely that there will be pressure on the sell side of a stock.
- How many shares are on issue?
- Are there any options or warrants?
- What is the company’s business plan? Where does it intend to mine, what does it intend to mine, how does it intend to mine, how will it make money?
- Does management have a good track record? Does management own stock, in other words have they backed their own company? Do they have a good track record of executing on a business plan? Have they made any previous discoveries? Have they been part of multi-million-dollar takeovers?
- What is the remuneration of the directors? Are they taking too much off the top?
- Does it have any high-profile backers or investors?
- What are the assets and are they diversified?
- Where are the assets located?
- What stage of the lifecycle is the company at?
- How long will it take to move into production phase and what are the projected costs to do so?
- Does the company have cash in the bank and what is the cash burn?
- Is it liquid?
- Does it need to raise money?
- Are the project assets close to infrastructure?
- What are the long-term forecasts of the commodity being mined?
- Is the company operating in an upcoming sector? For instance, battery metals.
- What is the political risk of the country it is operating? Is there likely to be a coup in an African nation for instance?
- Are there any price catalysts on the horizon? This could include assay results, production, offtake agreements etc …
- Is the company a takeover target?
Bonus question: Does the company operate under good ESG principles? Is the company’s environmental policies sound?
This information can generally be found across:
- Company presentations
- Company website
- Company announcements
- Annual Report and quarterly reports
- Internet chat rooms
- Stockbroker analyst research reports
The pros of investing in mining companies
- Required resources: Mining provides the world with resources that we cannot live without. As we stated at the top, those resources are the key to unlocking a more sustainable future.
- Established industry: Mining dates back 40,000 years and has trends and patterns that are often predictable (unless a pandemic occurs).
- Increasing demand: Increased demand paired with finite supplies equals increased commodity prices – which is great for investors.
- Decreasing supply: See above.
- Potential for high returns: Choosing the right company/companies to invest in can lead to big profits. However, you should know your risk appetite, do your due diligence and explore diversification.
The cons of investing in mining companies
- Understanding mining isn’t easy: Geological terms are sometimes only comprehensible to the geologist. Understanding the terms used by mining companies can be confusing, so make sure you know your assay from mineral resource estimate.
- Lack of information: While ASX requirements are quite thorough, there are often things going on in a company that investors may not be aware of. That’s why it is important to do your due diligence – thoroughly. On that note, an analyst’s research report is usually quite in-depth. However, many of those reports require payment shutting many mum and dad investors out of the loop. The least amount of information you have usually equates to a poor investment decision.
- Brokers: A good broker will lead you down the right investment path. A bad broker may have a lot riding on a risky stock and lead you down that path.
- Emotion: Investing in a mining company should not be an emotional decision, nor should you be influenced by emotive language – of which there is quite a bit.
- Volatility: Junior mining companies in particular are volatile. Many can’t and won’t make money and will not survive. Choose your companies wisely.
