You can invest in royalties, gold mining exchange traded funds (ETFs), mutual funds, stocks of gold mining firms, or exchange traded funds (ETFs) to buy shares in the industry. As with any investment, carefully consider the instrument. For example, carefully consider the prospectus and fees of a fund and the financials of a gold mining firm. Growth or value stocks are both possible for mining stocks. Because they are in the early stages of mining, where they must find a specific commodity in the ground, mine it, refine it for sale, and sell it, junior mining companies are seen as growth stocks. These stocks have a higher risk, but they also have a potentially significant upside. Major mining businesses are value stocks since they are well-established in the industry. Certain mining businesses do indeed pay dividends. However, not all mining corporations compensate them. Typically, dividends are paid by the main mining companies—the bigger, more reputable ones. The junior mining businesses, which are the smaller, newer firms, do not distribute dividends. These businesses reinvest earnings back into the business to support expansion. Since this is a primer, it suffers from being too general and too straightforward. Before making an investment in the mining industry, you should probably understand what greenfield exploration is, know how to calculate the impact of pricing risk, and be able to discuss the risks of making a purchase based only on a positive test.
Different parameters for assessing if a mining company represents value:
- Describe how you perceive future costs. Low costs are preferred because they may indicate greater resilience throughout the commodity cycle’s inevitable low points. This might also suggest greater intrinsic value (all else being equal). But we prefer a well-managed company with expensive assets—which can still produce excellent long-term returns—to a company with expensive assets that spends its entire revenue stream rather than returning it to shareholders (see our post titled “$400 billion reasons why mining management must change”).
- Analyse earnings based on long-term average prices and reasonable costs for moving materials. A unique problem in determining the value of a mining asset or mining firm is the volatility of mineral prices. They advise you to disregard consensus forecasts since they reflect the current state of the market (see our piece “Prophesies, Oracles, and Omens – Why You Should Ignore Single Point Forecasts”). Unless you have a specific opinion, we advise using the real price average for the previous 20 years. Avoid being misled by short-term expenses as well, since these can be impacted by over-grading during lulls or over-exuberance during peaks. Instead, utilise sustainable average costs for material movement over the previous three years.
- Pick businesses with little debt. Mine Insider favours mining companies with low debt to equity and low debt to earnings due to the volatility of commodity prices. Debt and erratic market conditions are hazardous combinations in any sector.
- Examine the board and management personnel consciously. We look for a track record of shareholder returns along with a disciplined history of effective capital allocation across the cycle.