Why you should consider investments into the mining industry
The mining industry focuses primarily on extracting minerals and other valuable resources from the earth. This sector includes the exploration, extraction, and processing of natural resources such as gold, silver, coal, precious stones, and metals. The profitability of the mining industry rests upon the demand and value of these commodities, which are used extensively in various sectors ranging from jewelry manufacturing, industrial and large-scale manufacturing, infrastructure and energy provision, transportation energy to tech. While mining sounds very old, and maybe even old-school (and yes, it is one of the oldest industries on earth, next to prostitution), it is experiencing a significant come-back, and offers plenty of investment opportunities to the informed investor.
PUBLISHED DECEMBER 2023
A new-year foreword (search-egine, please look away, this has nothing to do with mining):
A new year normally comes with all sorts of ‘New Year Resolutions’. Stopping smoking, improving the diet, running to the gym and other measures to reduce the enjoyments of live are common, and, mostly due to a lack of precise goal setting, die down quickly again. Gym companies have rather eye-opening statistics about that.
She has set herself goals and followed them up. Image by gpointstudio on Freepik
I don’t like gyms, largely because the music is awful, and the welcoming by the staff is artificially cheerful. Hence, my resolution is outside of gyms: To supply my customers (you) with top quality information about investment options in the mineral, metal and mining industries.
If maybe your resolution is to fully exploit financial opportunities and increase your ealth and portfolio, we might have a match. I intended to start the year with zooming in from the broader picture, which is a look at the mining industry at large. Because, mining is set for a boom over the next, well, not years, but decades really. I will come back on this later in the article:
What is mining about – and how can you invest in mining?
Mining in the mid-ages was already quite advanced - because it dates back thousands of years
While even older as an industry, I have no clue if investments here have any good returns? (c) by Silvia Vacca
When it comes to investing in the mining industry, you have a selection of investment avenues to choose from (also see our blog-post on lithium investment options here). Direct investments, for instance, allows you to invest into mining companies through the purchase of stocks. This direct approach permits you to enjoy financial gains should the company experience a boost in profitability due to a surge in commodity prices or successful explorations. However, this option requires astute knowledge of the company and the industry at large, as it leaves you vulnerable to specific company risks.
In the realm of varied mining investment strategies, participating in mining-focused funds, such as mutual funds and exchange traded funds (ETFs), presents a captivating route. By pooling resources with other investors, you capitalize on diversified exposure to multiple mining companies, rather than a singular entity. Funds, typically managed by seasoned investment professionals, assimilate an array of stocks from companies operating within the mining sector, spanning a continuum from mineral explorers to large multinational corporations.
Consequently, you share the bounty of potentially lucrative returns from different commodities and regions with reduced systemic risk. However, it is crucial to remember that, like any investment strategy, mining funds do expose you to sector-wide volatility. Inadequate diversification within the fund itself might present further concentration risk. Add this to the ongoing management fees, it remains essential for you to carefully evaluate the cost-benefit ratio before diving into mining fund investments.
The Gold Rush: Direct Investments in Mining Companies
Investing directly in mining companies represents a traditional and straightforward method to gain entry into the mining industry. In this approach, you become a shareholder of the company by purchasing its stocks when they're publicly traded. Your profit as an investor arises when the company operates lucratively, resulting in the augmentation of share prices and/or dividend payouts. It must be understood that, in addition to the performance of the firm itself, a variety of external elements, such as commodity prices, geopolitical shifts, and industry-specific legal regulations, can profoundly influence the company's profitability and, by extension, your investment return. When looking at the sector’s elephants, we talk about truly global corporations, that supply the world with basically all the commodities it needs:
Company Name | Market Capitalization (2022, USD) |
|---|---|
BHP | 180.22 billion |
Rio Tinto Group | 140.70 billion |
Vale S.A. | 109.71 billion |
Glencore | 78.84 billion |
Cell | Cell |
The demand pattern for mining only shows one way: Upwards
The rising global need for minerals and metals, driven by rapid technological and infrastructural development, marks a promising trend for mining investors. As industries, particularly the bourgeoning electric vehicle and renewable energy sectors, continue to diversify and advance, the demand for raw materials such as lithium, cobalt, and copper are projected to surge. But even beyond the ‘electrification paradigm’ which is sung in the West, mining also powers the tremendous economic growth in the developing world: Gigantic and growing quantities of steel, copper, zinc and other base metals are needed for new infrastructure, industrial complexes, etc.
A lot of people that want to build a lot, do a lot, produce a lot. A lot of demand for mining products. There are thousands of fast growing population centers in the developing countries. Image by wirestock on Freepik
I haven’t heard of any statistic that would tell me that the overall demand for minerals and metals until 2050 (or 2100 for that matter) would not increase. It will! Hence, this perpetual reliance on minerals and metals creates a profound opportunity for investors, as the expanding market and civilization's incessant need for resources imply potential for significant returns on investments in the mining sector. This upward trajectory in demand effectively assures the continued relevance and profitability of the mining industry, making it an attractive prospect for both established and aspiring investors.
With mining activities increasing round the world, many people (and maybe also investors) are scared if this is good - or if mining is too destructive after all? I am sharing some thoughts on my mining, the environment and you blog.
Large mining companies, such as those listed above, often reward their shareholders with consistent dividend payments.
Dividend payments offer an interesting version of passive income over the years if done properly Image by vectorjuice on Freepik
These dividends, serving as a portion of earnings directly disbursed to investors, provide a steady stream of income in addition to any capital gains achieved through increased share prices. Over the long-term, this can result in sizable returns for shareholders. Notably, large mining operations are particularly well-equipped to maintain dividend payments in times of market instability due to their scale and operational breadth, providing a consideration of stability amidst an otherwise volatile sector. Therefore, investing in these prominent mining companies not only provides the benefits of potential capital appreciation, but also the regular financial appeasements of dividends, making them incredibly attractive to income-focused investors.
A drill platform of a Junior Mining company, searching for the next big deposit
Junior Mining or exploration companies are a part of the mining industry, but represent a special niche. They are at the beginning of the mining value chain, as they are the once who look for new deposits in order to prevent the world from running dry on metal supplies (which by the way, would be a major catastrophe).
This niche of the industry operates in a very special way, and can yield very special returns. While the ability of junior mining stocks to yield incredibly high ROI cannot be overstated, it's crucial to remember that they come with a correspondingly high risk. But why, you might ask? Since these companies are typically in the exploration or development stages, they may not have a profitable operation yet. As such, they tend to rise and fall based on projected future earnings or the potential value of their mineral discoveries, which can make for a highly volatile investment.
But, and this is from my own experience, the possible rewards for such a successful endeavor can be colossal, with numerous examples of early investors making many times their original stake. For instance, a well-played investment in a junior miner that uncovers a sizable deposit could see returns of hundreds or even thousands of percent. Naturally, such outcomes require both a finely tuned investment strategy and a solid knowledge about this industry.
What would you do if there was an online course dedicated to Junior Mining?
Well...there is! Explorado Invest has developed the world's first and only online course which is fully dedicated towards successful Junior Mining investments.
Learn all the secrets, skills and tricks for you to succeed in one of the most rewarding industries that operates on the globe.
Nonetheless, the potential financial gain from a junior mining investment, when successful, can make the effort and risks not just worthwhile, but extraordinarily rewarding.
Navigating the Veins: Strategies for Investing in Junior Mining Stocks
Being successful in investing in junior mining companies requires strategic planning and thorough research. But don't worry, this is exactly the expertise of Explorado, and indeed the reason why I have founded this company.
But more about that later. In any case, we can agree that understanding the niche market of junior mining stocks is crucial to fully leverage their high-yield potential (look at our dedicated blog article here for more information). These stocks are notorious for their volatility; hence, the need for critical risk assessment cannot be overstressed.
Junior Mining is unique, a bit mysterious, and a great opportunity for investors - if they understand a few things on how that works. In the blog article, I provide a basis of understanding
Strategic timing, diversifying your portfolio wisely, and leveraging information about exploration projects are pivotal for enhancing returns in this realm. Using services of professional analysts (like me) can help in navigating the seemingly enigmatic maze of junior mining investments.
Me on a trip in Mauretania, to visit gold exploration projects in 2018
Exploring ETFs and Mutual Funds in Mining Industry
But…mining offers other vehicles to increase your portfolio as well: Exchange-Traded Funds (ETFs) and mutual funds tied to the mining industry offer another alluring investment avenue. These funds allow you to spread your risk across a wide spectrum of companies within the sector, thereby providing a more diversified investment. These entities buy shares in a multitude of mining companies, giving you exposure to the sector without tying your fortunes to the success or failure of a single enterprise. Mining ETFs, such as the SPDR S&P Metals and Mining ETF or the Global X Silver Miners ETF, can help investors access a broad range of companies tied to the mining of metals like gold, silver, platinum, and palladium.
On the other hand, mutual funds like the Fidelity Select Gold Portfolio and the VanEck International Investors Gold Fund invest majorly in gold mining companies across the world. These funds may include not just producers of the precious metal, but also companies that specialize in exploration and development.
Investment in mining-related ETFs and mutual funds can provide an attractive mix of growth and defensive traits that can help buffer an investment portfolio. However, as with any investment, there is a certain degree of risk involved (sorry – there is never ever any investment without that bloody ‘r’ word). Prices of the underlying commodities can fluctuate greatly, affecting the profitability of the mining companies within the fund and, subsequently, the value of the ETF or mutual fund. Additionally, geopolitical risks, like changes in mining regulation or political instability, can negatively impact these investments. Think about Niger. And Ukraine. And Gabon. And Germany (yes, where electricity prices go through the roof – that too is a risk).
Currently not the highest score for mining and FDI: Niger during the coup
Choosing the right ETF or mutual fund for mining investments also requires doing due diligence. It's important to research the track record and management skills of the fund, the diversity of its holdings, its costs, and its investment strategy. Be prepared to monitor the fund regularly and make adjustments as necessary to your portfolio.
Understanding the Rocky Terrain: Risks Associated with Mining Investments
Whether it is Achilles, Siegfried (depicted above, in an unfriendly dispute with Hagen) or mining companies - all have their weaknesses. It is for you to be aware of it.
So, lets look at the ‘r’ word once more: We can’t access the world of mining and/or investments in general without first acknowledging the potential risks. We mentioned commodity price volatility before – and that of course is the Achilles heel of the industry
Mining commodities, such as precious metals and energy resources, are subjected to wild swings in price dictated by a slew of global market factors beyond control. An investor may find themselves at the mercy of sudden shifts in supply and demand, geopolitical unrest, or adverse economic conditions, all contributing to price fluctuations that can radically affect profitability. On the other hand, these forces can also pull prices up, servicing unexpected (or maybe well calculated?) increases in your mining portfolio value.
Environmental risks also bear a heavy presence in the concerns of any potential investor, especially at times where well connected NGOs will turn each rock twice before giving a green light to a mining project. Sudden environmental incidents such as spills, leaks, or other unforeseen disasters can result in enormous clean-up costs, legal ramifications, and a tarnished reputation that drives away future investors.
If mining communities have a problem, the mines have a problem. Social collaboration with communities is a vital part to acquire the social license to operate for mines. Scene from Papua New Guinea.
Additionally, the industry is subject to regulatory risks. Changes in government regulations and policies can significantly affect the mining operations and investor return. International laws, policies regarding workforce safety, environmental legislation all have the potential to tip the scales. For instance, changes in environmental standards might lead to increased operational costs or even a halt in the operations altogether, impacting the investor's returns.
In understanding these risks comes the ability to strategize and weather the uncertainties that may unfold.
Risk Management: Your Safety Helmet in Mining Investments
In investing, what is comfortable is rarely profitable.
Robert Arnott
Well-known investor
Mr. Arnott is right, unfortunately. To decrease the risk associated with mining industry investments, investors need to follow a well-thought-out, methodical approach that involves thorough research and a keen understanding of the industry dynamics. Here are some key measures one should consider.
First and foremost, diversification plays an essential role; it's the golden rule of any investment strategy. By spreading investments across different types of mining stocks, ETFs, or mutual funds, you expose your portfolio to a variety of companies, thus mitigating the risk of your investments being too concentrated in one area. I am a friend of the idea to put a reasonable portion of my portfolio - not the majority -to potentially high-risk but high-reward sectors such as Junior Miners. You are limiting this exposure with the rest of the portfolio being allocated towards more conservative investments.
Secondly, conducting comprehensive due diligence on prospective companies and funds is critical. Assessing a company's management team, financial statements, market position, and operational efficiency can provide insight into its potential to perform well. Be particularly cautious of companies with high levels of debt, as they may be more susceptible to bankruptcy in periods of commodity price downturns.
In addition, staying abreast of the global, political and economic landscape plays a pivotal role when investing in the mining industry. Fluctuations in commodity prices, exchange rates and regulatory environments can drastically influence the profitability of your investment.
The fourth key advice is to ask for professional guidance. Navigating the mining investment landscape can be complex, so leveraging the expert knowledge of financial advisors or industry analysts can be beneficial.
Finally, having the patience to commit for a longer-term can help ride out market volatility. As with any investment, time innately diffuses some of the risks involved in mining investments. Consider mining as a strategic portion of your long-term portfolio, rather than a quick way to make a sizable return, even though with Junior Miners in your portfolio, that could also well be an option (and guess what – getting rich quick is not illegal).
Lessons from Successful Mining Industry Investors
At the end, I want to give you a positive appetite to consider this industry for your portfolio (parts of it) for 2024, and I aim to do this by talking about mining investors legends.
You can amass wealth by investing in the mining industry. Totally without using fowl play. Image by fxquadro on Freepik
If the illustrious annals of successful mining industry investors are anything to go by, investing in this sector can undeniably be a lucrative venture. Not only does it offer robust returns during favorable market conditions, but it also provides a hedge against economic uncertainty (gold gold gold). So, what can you learn from these investment maestros who have successfully navigated the labyrinth of the mining industry?
One of the paramount lessons is the indispensability of meticulous research. Renowned investors like Katusa Marin, Robert Friedland, and Clive Johnson owe much of their success to their unwavering commitment to understanding the intricacies of the industry, including individual mining companies, geographical location, the element being mined, and potential market demand among others. Their achievements underscore the importance of exhaustive diligence before any type of investment.
Another vital lesson emanates from their prudent risk management strategies. Knowing that the mining industry is fraught with volatility and uncertainty, successful investors place immense emphasis on risk diversification. Investments are carefully spread across various sectors and geographical locations, demonstrating a clear understanding of the phrase, "don't put all your eggs in one basket". This helps to mitigate potential losses and ensure the sustainability of profits.
NOT the way to go. Image by mrsiraphol on Freepik
Thirdly, the most accomplished investors in the mining sector exhibit a long-term investment horizon. Fluctuations in the global economy and commodity prices are an integral part of the mining industry. Prosperous investors like George Soros and Pierre Lassonde have often displayed patience, riding out the storm during economic downturns and capitalizing on the upswings.
Lastly, they leverage the power of networking in the industry. Establishing relationships within the sector offers access to viable opportunities, expert insights, and enhanced decision-making capabilities. So, if you aspire to be part of this exclusive cadre of investors, the mining industry is undeniably an enticing proposition.
In conclusion, while the terrain of the mining industry can be rugged and unpredictable, the trails blazed by successful investors offers invaluable guidance. Armed with these lessons and a carefully crafted strategy, you can navigate the mining industry confidently while protecting your financial prospects. Investing in this sector could indeed provide that golden opportunity you are seeking.
Best of luck for this in 2024!
