Getting Started in the Mining Industry
While some investors love chasing the latest technological trend or favorite consumer product or service, others prefer investing in something more primal. These investors like companies whose business is easily understood – something solid. They want a product that has real value, no matter what.
Mining companies harvest metals and minerals essential for every industry, from manufacturing and construction to technology and transportation. They deal with commodities like gold, silver, copper, iron, molybdenum, uranium and more, elements that are largely responsible for our modern world.
Mining Stocks 101
The mining industry is somewhat unique in the world of business. Standard ratios like price-to-earnings don’t have as much relevancy, meaning that investors need to analyze mining stocks with other forms of data. That’s because mining companies carry large amounts of metals on their balance sheets, making assets far more important than earnings.
The cost of production is arguably a mining stock’s most important statistic. The lower the all-in sustaining cost of production, the lower prices for the mined metal can drop before the company becomes adversely affected. It also means margins are higher. For example, a gold miner with all-in costs of $500 is in a better financial position than a miner that has costs of $750. It also means the former company has more room for error if the price of gold drops. If gold dropped to $700 per ounce, the first company would still be profitable while the second would need to stop production until the price crossed over the break-even point.
Investors should also note the differences between a junior miner and a senior mining company. Junior miners are focused on exploration rather than production. That makes them far more volatile, since locating metals and minerals is a risky endeavor that doesn’t have any guarantees of success. Senior mining companies, however, operate mines and focus on production. That makes them more stable than junior miners.
There’s one last type of mining company – streaming. These types of mining companies have purchase agreements with other mining companies to buy some or all of the metals mined at a predetermined cost. That makes it more resistant to changes in commodity values and even more stable than traditional mining companies.
There’s a risk in the mining industry that doesn’t exist in most other industries – commodity risk. Because these companies deal with metals that are traded as commodities, price fluctuations can change the overall value of a mining stock. A drop in the value of gold means that margins for a gold miner are reduced. If it drops below the company’s cost to extract the metal, then it starts hemorrhaging money. Investors should keep a watchful eye on commodity values when owning a mining stock.