Precious Metals Investments | Mining Stocks

1) What you should know about stocks of mining companies

If you decide to invest in precious metals (silver,gold,palladium) or base metals (copper,lead,nickel), you have the possibility to do this two ways. You may physically  purchase such metals or buy stocks of different mining companies.

Entreprises seeking and producing raw materials are called mining companies.  And, entreprises which are not yet producing raw materials, but seeking them in their property are called “exploration companies”.  Another difference is made by seperating Senior and Junior exploration companies.  Contrary to a junior explorer company, senior explorer companies have extensive results and facts about their property (for example: a feasibility study about a deposit).
Mining companies already producing can produce precious metals and raw materials either through opencast- or underground mining.

The market net worth ( stock price X number of stocks) of precious metals and raw material producing companies is relatively small in comparison to bonds or any other market stocks.  
When the raw material baisse climaxed around the new millenium, the market net worth of all worldwide producing gold mines together didn’t even reach the market capitalization of a single company like Microsoft.

Stocks of mining companies are traded in the companies’ home stock exchange.  This way, projects can be located fully abroad (or at least to a certain extent).  A good example is a mining company with projects in Mexico but has its registered office in Great Britain. This means that the company is traded in London.

What you should definitly keep in mind when planning to buy mining stocks:

Investing money in mining stocks requires the readiness to deal with daily price fluctuations of up to 10% in both directions – upwards and downwards. 

But, this high volatility isn’t a rarity for blue chips.  A method of pulling down stock prices artificially is called “stop loss fishing”.  Often, funds try very hard to bring down the stock price of small companies by triggering stop losses placed in the market. Triggered stop losses pull down stock prices and create cheap entry level opportunities for large investors.

Never forget to set a limit when purchasing mining stock companies. Always keep in mind that these companies have a very small market net worth of a few million US dollars -particularly small companies like exploration companies. This is mirrored again in sales figures, so it might occur that there is no trade for several days in succession. If unlimited orders are placed in the market, the stock price can unintentionally jump in both directions. To defend yourself from that, you should orientate yourself by the stock price of the strongest-selling stock exchange.  In most cases, this is the home stock exchange of the company.  Also, you always need to keep an eye on the local currency and current exchange rate.

All stocks are not created equal! In addition to original stocks, ARD stocks (American depository receipts) are traded too. An example of an ARD stock would be South  African DRDGOLD (former Durban Roodepoort Deep). This company was traded in the United States until june 2003 only as an ARD stock. However, it was traded as an original paper in South Africa and Paris.
ARD stocks are tradeable warrants of deposit which embody property on stocks of non-US-American companies.
Warrants of deposit become traded in US dollars in the majority of the cases.
ARD stocks were introduced to provide access for foreign investors to hardly accessible markets for small investors.
China is such a market today because everyone wants to participate in the huge growth of this large market. But, buying Chinese stocks is difficult for small investors while most Chinese stocks are listed in Shanghai or Bejing. And, that is why ARD stocks were created.
However, it’s absolutely important that the CSD (Central Securities Depository) guarantees honesty, correctness and transparency to the investor.  This hasn’t always been the case during the past years.  A worst case sceanario for an ARD would be the CSD going bankrupt and you couldn’t be told the worth of your stock!!
The lesson is clear: if you have the possibility to buy original stocks instead of ARD stocks, take that chance!

2) Essential conditions for investments in Junior/Senior exploration companies

Before purchasing junior or senior exploration stocks, the following aspects should be applied to the company of your choice.  You need to realize that such investments bear the biggest chances of profit as well as the highest risks, maybe even a total loss of all your money invested.

- Does the company have at least one promising project whose drilling results suggest the existence of an economic exploitable deposit?  The aim of every explorer must be finding an economic exploitable deposit!

- It is vital that an exploration company has a management consisting of experts from the international mining industry as well as experts being experienced in the financial and stock sector.

- If companies don’t have enough money to press ahead with exploration and mine development, resources in the ground can be endlessly big, but the finanacing aspect of the future mine is not verified. Yet, a promising investment is and will continue to be high risk to an unjustified level.  That’s why it is essential to keep an eye on investors which are willing to support the exploration company through private placements.

Always remember: long-term orientated investors must definitly be preferred.  Short-term investors, also called venture-cap-investors, finance exploration companies at the early stage but they often drop it after a stock increase of about 100%.

All the key points mentioned relate to the management and administrative aspects of the company. However, you should have a closer look at the deposit and the single projects.  These are the major assets of an exploration company.

- Where are the deposits located?  Do they lie in a country with political stability and no corruption?
If the answer to this question is “No,” you should be aware of the fact that existing risks will be heightened.

- If a company is listed in Canada on Venture or TSE, you must attach importance to a conform NI 43-101 report. This report is drawn up by an independent expert who scrutinizes the results of resources and financial reserves published by the company.

- Raw material projects located in unexplored regions mostly don’t have a working infrastructure which guarantees the transport of future exploitable raw materials to the factory.  Here, attention must be payed to the amount of money which needs to be spent to install an efficient infrastructure.  Become aware that TOP projects are condemned to failure if it becomes too expensive to build streets or water supply in a hardly accessible area.

- Suddenly appearing metallurgic problems can stop promising projects.  For example, a mineral of value can’t be seperated from superfluos rock.

- Further risks are ecological problems, problems with native inhabitants and resistance arising out of the local population.  Even archeological probelms are likely to come up.

Let’s assume you attended a raw material fair where 100 different exploration companies introduced themselves.  Then, you can be sure that only a fractional part of the companies eventually reach their desired objective, which is to achieve producers status.
This fact shall only make you aware of the risk you take when doing such an investment in the exploration sector.

On the otherside, the market rewards such risky purchases by more than 100% if a company finally commences production.

3) This is how you can find a promising investment       

The following aspects faciliate the search for an appropriate investment in the mining sector.
This is especially true for investments in pure exploration companies which call for

a) detailed investigations and
b) eventually also a bit of luck.

According to estimations, there are about 3000 mining companies in North and South America.
Every single president and CEO has a story, a vision and an absolutely reliable explanation why exactely his company is the best. Finding the most successfull and consistent companies in this unclear market isn’t easy at all. Good trade journals and market newsletters can be a great help. However, not every market newsletter represents the readers interests!  That’s the reason you need to inform yourself fully about them.  Because in the end, it’s all about your money!

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