Before you start investing in mining stocks, it is better to understand the industry and the related risks. While it may seem easy to invest in mining stocks, the industry has its peculiarities.
In this blog post, we will look at different types of mining stocks and things to consider before investing in them.
Mining companies explore, process, and sell precious metals, raw materials, and minerals. Based on the raw materials they operate; mining stocks in Canada or anywhere else can be classified into various categories such as:
Base Metals: The most common base metals include nickel, zinc, aluminum, cobalt, iron ore, and copper. These base metals are used mainly in electrical components and building materials.
Precious Metals: They are rare occurring metals with high economic value such as silver, gold, platinum, and palladium mostly used in jewellery and currency.
Energy Materials: Several materials are burned and processed to create energy. One common example is coal. Uranium and bitumen are other energy materials extracted by the mining industry.
Construction Materials: Limestone, sand, granite, and trap rock are the most common construction aggregate materials. They have different uses in the construction industry.
Furthermore, mining stocks can be divided into two categories, majors and juniors. Majors mining stocks are usually mining companies that have been in the industry for years and mostly operate mines on a global scale. On the other hand, Juniors are smaller mining companies that mostly conduct risky mining explorations. They offer speculative appeal but can be highly volatile.
Avoid Hype: It is better to avoid investing in stocks that trade at high prices due to the broker hype about the commodity. Better focus on mining stocks that are priced reasonably.
Prefer Stocks of Companies with Low Debt: Due to the volatility of commodity prices, it is better to choose mining companies with low debt-to-earnings and low debt-to-equity. Debt and volatile prices can be a dangerous mix.
Diversify Your Investment Portfolio: Diversification is a crucial part of any investment strategy. Include multiple mining companies in your portfolio to capture potential opportunities and reduce risk.
Focus on Stable Political Regions: When investing in mining stocks, it is usually recommended to stay away from companies operating in politically unstable regions. Mining is a politically vulnerable business therefore it is recommended to invest in companies that belong to stable political regions. The regulatory environment such as government policies and permitting processes also significantly impacts mining stocks. A company operating in a stable environment is likely to experience less volatility compared to a company functioning in a region with an uncertain regulatory environment.
Cost of Production: The expenses related to exploration, extraction, processing, and transportation can affect mining stocks. The cost of products can erode the returns. Therefore, a company with cost-effective mining techniques can lead to higher profitability. This makes production costs a critical factor when choosing mining stocks to invest in.
Company-Specific Factors: There are many company-specific factors such as management expertise, exploration success, and asset quality that can affect stock performance. A company with solid financial health is better positioned to weather market downturns in comparison to a company facing operational challenges.
The mining stocks in Canada are popular among investors as they provide a chance to balance their portfolios. However, as an aspiring mining investor, you should do some research that can help you remain better prepared and mitigate risks.
At The Investors Coliseum, we’re dedicated to providing our subscribers with the most current and accurate information to help them find viable solutions and achieve their mining investment opportunity goals.