Understanding mining stocks
Juniors mining stocks are low-capital research companies looking for new deposits of natural resources. Junior mining companies are engaged in exploration, development, and getting the mine permitted with the purpose of producing up to 300,000 oz/year. Anything above that would be considered a major company.
Junior mining stocks: Hope or Reality
Investments pertained to juniors are high risk as they are new in the market and do not yet have a validated asset base. However, the potential is there for considerable reward and huge excitement if the exploration and development are successful.
Generally, a successful mining story will start as a junior and evolve through to a major, improving in value and size along the way. The risk of investment also tends to reduce, but so do the probable rewards.
Why should I invest in junior mining stocks?
The pros of investing in mining stocks
Junior mining companies frequently form an exploration pipeline that feeds into the majors. The investment risks are clearly higher, and juniors are famously speculative. So why would you invest your money here?
- Mining gives a resource that humans can’t survive without: Natural resources are the foundation of all industries on earth, and the demand is only intensifying as supply becomes scarce.
- : Mining is one of the most predominant industries in the world.
- Waning supply equals increased profit : Demand for natural resources is dramatically increasing as a consequence of the increase in the world population.
- Simple process to comprehend if you do your research : Although complicated at first, the mining industry is moderately easy to understand and invest in.
The cons of investing in mining stocks
With huge risk comes huge rewards, many juniors fail, but this implies the demand for those that succeed is high.
- The mining system can be complicated
- Lack of information available to retail investors : Retail investors frequently do not have access to the sorts of company reports that are paid for by institutional investors.
- Brokers taking advantage : Individual investors are believed to be less knowledgeable, less disciplined, and less skilful than institutional investors so they are usually presented with more risky investment opportunities.
- Confirmation bias : Confirmation bias kills profit. There’s a lot of prejudiced information online, paid for by the company that is deliberately skewing the facts of the company it’s promoting.
- Extreme volatility : There are thousands of junior mining companies listed on exchanges globally, and new ones are constantly appearing, some good, and some bad.
Junior vs Major stocks
Investors need to assess which they are better suited to.
- Junior mining companies offer high leveraged profit on investment when investing at the exploration stage, but only a minor percentage will succeed through to the development or production level.
- Major mining companies offer a more safe and steady investment, but with smaller returns.
Can’t decide which to choose?- Some investors decide to split their investments between the two, offering both risk and stability. With a blended risk strategy to their portfolio.
Are junior mining stocks good investments?
If you do the proper research and keep an eye on your portfolio, junior mining stocks can prove to be decent investments.
Key points to consider before investing in junior mining stocks:
- The business model of junior mining companies depends on the amount of resources in their asset. It is basically impossible to know how much resource is really there until it has been mined.
- Investing in individual junior mining companies is very risky. There are a bunch of factors that can cause juniors to fail, such as geopolitical issues, permitting issues, or just not having any resources.
- Stocks can rise sharply on positive results and plunge on negative results.
- Junior stocks are generally held by individual investors, rather than institutional investors. Individual investors constantly make emotional decisions, causing volatility in junior stocks.
- Junior stocks correlate with the overall stock market.
How to get started with investing in junior mining stocks
- Decide if you have any desire to invest in mining.
- Be clear about your own investment strategy and stick to it.
- Decide what your risk appetite is.
- Take time to survey the markets and see which commodity you think shows the most potential.
- Identify a bunch of companies to study and follow.
- Take your time and determine your method of analysis.
- Research that company until you’ve got detailed knowledge.
- Listen to the company’s explanation of the business plan, does it sounds good to you?
- Invest a little at first, see if you’re satisfied, and add more over time.
How to Invest
Flow-through funds
Junior mining companies issue flow-through shares as a means to raise funds for exploration and development. Flow-through shares are issued at a higher price than formal, giving companies the extra cash they need for mineral exploration. Companies at the exploration stage usually have no net income and consequently have no way to claim these deductions. With a flow-through funding structure, a company issuing flow-through shares forgoes these benefits and gives them to the investor.
While the flow-through shares structure is a tax shelter for investors, there are a couple of things to be careful about:
- The temptation of the tax advantages could convince you to make a dangerous investment you wouldn’t make otherwise.
- Companies issuing flow-through shares normally have very limited income and are tight on financing.
- If you purchase flow-through shares through a partnership, a fraction of the shares are saved for the fund’s brokers and managers.
- Fund managers might make immediate decisions to get money to the company and tax benefits back to investors quickly. Immediate decisions aren’t generally the best decisions.
- Also, flow-through shares are illiquid and must be held for 18 to 24 months to get the entire benefits.
Before purchasing flow-through shares, study the company the same way you would any junior mining stock. Evaluate the tax advantages against the possible disadvantages, and make sure you are satisfied with this type of investment.
How to Start Investing in Junior mining stocks
- Select the right company: Research companies before you invest. Search for management teams experienced in exploration and development. Select a company with a valid track record of opening and operating a mine. Ensure operational costs are low so the mine will be profitable.
- Build a portfolio: Rather than investing in a few junior mining companies, construct your own portfolio of companies in the sector. Select a variety of companies that are at distinct stages in the mining life cycle and that are extracting different commodities. Several will fail and some will succeed, and a balanced blend of companies will protect your capital investment.
- Monitor the stocks: once you’ve invested, always keep an eye on your stocks.
- Have an exit plan: As soon as you invest, have a strategy for when you’re going to sell. Junior mining stocks are highly speculative and subject to investor obsession. An exit plan will help you look past the fanfare and get to the core of the matter.
As discussed, the junior mining industry is full of numerous opportunities to get caught out. So do your thorough homework before investing your money, or you can save yourself a lot of stress by contacting your Damalion experts now.
This article is not an investment proposal nor an investment advice and should not be considered as such.
