The mining sector has provided us with everything that we need for daily life and human progress over centuries. From gold and diamonds used by ancient kings and queens as a measure of their wealth to the copper that goes into powering industrial products, mining has provided all this and more. In our 2-part series we look at 6 points that you should know before you answer that crucial question: Are mining companies a good investment.
Before we ask ourselves: are mining companies a good investment, it would pay to consider the following:
Majors vs Juniors
Mining majors are companies that have been around for a long time and usually have well-managed global operations with reliable cash flows and a steady production cycle. Like big oil and gas companies, they have a well-established track record and declared financial information which makes investing in them quite straightforward.
Then, there are mining juniors. These are smaller companies that are usually in the process of developing a resource. They are usually smaller companies that need to raise capital to do what they are doing on the field. While the investment in their companies can be riskier – if the companies are successful in finding the resource they hope to find – the rewards are potentially greater.
But it is important for you to do your due diligence whatever investing choices you may make.
Classification based on type of output
A> Base metals: Are non-ferrous metals (don’t contain any iron) that aren’t noble metals and have a lot of applications for industrial purposes. Some examples are: iron, copper, aluminium, lithium, zinc, molybdenum and cobalt.
B> Precious metals: These are metals that have a high value and are usually used to make jewellery. We are talking gold, silver, platinum and palladium.
C> Minerals: these are chemical compounds with a variety of uses found in their natural state. We are talking about: potash, quartz, diamonds, gypsum, calcite, talc.
D> Energy generating materials: One example is coal which is fossil fuel. Another is uranium.
E> Construction materials: these are materials that are useful for construction and building. For example: Granite, marble, limestone and sand.
Research tips – be informed
Ask yourself all these questions before coming to a decision:
A> What stage of the production cycle is the miner at right now?
B> Time and money: how many years will it take until the mining company reaches production? And how well funded are the stages ahead.
C>Who is running the company? Does the management team have experience and authority in the sector? Can they be trusted to be good leaders who will do the right thing?
D> Risk analysis: what are the potential risks emanating from the project? Is there likely to be a change in some of the conditions that will stop the company from reaching its goals?
E> Have you read the technical report detailing the nature of the reserves, the quality, estimate mine life and other factors? Was this report generated by a well-qualified person?
F> How much money has been raised so far and how much is still to be raised?
G> Is the deposit in a politically stable country?
In the second part of this article, we will look at three more concepts that you must think about before answering that crucial question: Are mining companies a good investment?