How to Interpret the Sector

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Why Mining Stocks

Mining stocks are mining companies that are listed on the stock market. There are always plenty of opportunities to profit from investing in this sector. We are going to outline what factors influence this sector, what risks are involved and how to look for the types companies that offer the best return or lowest risk.

Simply put, a market sector is used to describe a part of the economy. It encompasses similar companies under one banner. For instance a hospital and an aged care home would be considered under the “Health Care” sector.

The mining sector is a sub sector of the materials sector. The materials sector refers to all is all raw materials that are sold on to produce and make other items. The materials index is  under the ticker SPLRCM which is the measurement tool commonly used to track the performance of the materials sector and thus the mining sector.

We believe there is currently a huge gap between professional and everyday investors. Where professional investors have access to insights and information that normal investors do not.  We’re here to bridge that gap by providing analysis that is accessible and easy to understand.

Sector Rank
In United States

See Full Ranking Here 

5 th
Current Rank
12
Total Sectors

Percentage Change Since last month

SPLRCM Index Decreased By 1.77%
-1.77%

Risks you should watch out for!

Decline in Commodity Prices – Mining companies are always impacted by changes in the commodities they mine, if prices of the commodity their mining declines in value then the companies profitability might decreases and so might the stock price. 

Increases in trade barriers–  If a country decided to place taffiffs or quotas on international exports then miners that are exporting would experience higher costs when they go to sell their commodifies overseas this would increase the companies costs and negatively impact the profitability of the mining company.

Exchange rate risk –  This is more true for mining exporting countries, when their domestic currency appreciates. When these miners are paid for their raw materials or assets the international currency is converted into appropriate rate in the domestic currency. If the domestic currency is high then the producer receives less when the international currency is converted resulting in less profitability for the mining company.

Political Risk–  Even if you have perfect market conditions and the relevant mining licenses there is always the possibility of political risk.  These risks are more common with countries that have a large degree of political instability in countries with less stable governments. Countries that are less politically stable like Solomon islands, have more volatile legal systems and could see changes in mining claims and leases. They are also more prone to corruption that could influence certain mining lease outcomes against the company that secured the mining lease. Companies that are operating in more stable countries would always be preferable when selecting mining stocks.

Exploration Risks

This type of risk occurs in the exploration stage of the mining companies timeline. If you are unfamiliar with the basic timeline for mining companies see the timeline below. This type of risk occurs when the results of feasibility studies show that the mineral they are looking for isn’t there or there is only a very small deposit. Although this has an impact on both Major and Junior miners this risk is more of a threat to Junior miners because they don’t have a larger amount of capital or an existing profitable deposit that can finance additional searches.

Risks you should watch out for!

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Decline in Commodity Prices – Mining companies are always impacted by changes in the commodities they mine, if prices of the commodity their mining declines in value then the companies profitability might decreases and so might the stock price. 

Increases in trade barriers–  If a country decided to place taffiffs or quotas on international exports then miners that are exporting would experience higher costs when they go to sell their commodifies overseas this would increase the companies costs and negatively impact the profitability of the mining company.

Exchange rate risk –  This is more true for mining exporting countries, when their domestic currency appreciates. When these miners are paid for their raw materials or assets the international currency is converted into appropriate rate in the domestic currency. If the domestic currency is high then the producer receives less when the international currency is converted resulting in less profitability for the mining company.

Political Risk–  Even if you have perfect market conditions and the relevant mining licenses there is always the possibility of political risk.  These risks are more common with countries that have a large degree of political instability in countries with less stable governments. Countries that are less politically stable like Solomon islands, have more volatile legal systems and could see changes in mining claims and leases. They are also more prone to corruption that could influence certain mining lease outcomes against the company that secured the mining lease. Companies that are operating in more stable countries would always be preferable when selecting mining stocks.

Exploration Risks

This type of risk occurs in the exploration stage of the mining companies timeline. If you are unfamiliar with the basic timeline for mining companies see the timeline below. This type of risk occurs when the results of feasibility studies show that the mineral they are looking for isn’t there or there is only a very small deposit. Although this has an impact on both Major and Junior miners this risk is more of a threat to Junior miners because they don’t have a larger amount of capital or an existing profitable deposit that can finance additional searches.

Opportunities to look for!

Increase In commodity prices – Mining companies are always impacted by changes in the commodities they mine, if prices of the commodity their mining Increases in value then the companies profitability might Increase and so might the stock price.

Successful Exploration Activities- This opportunity arises in the exploration stage of the mining companies timeline. If you are unfamiliar with the basic timeline for mining companies see the timeline below. This type of opportunity occurs when the results of feasibility studies show that the mineral they are looking for is in fact there and the feasibility study highlights proof of a high grade deposit. Although this has an impact on both Major and Junior miners this opportunity has a greater impact on the Junior miners stock price. This is due to the fact that the deposit may be worth more or even  50% of the total market capitalization of the Junior miner and therefore would be reflected in the stock price.

Joint Venture or Merger- This opportunity is most common when a Junior miner has a successful feasibility study and a major miner forms a joint venture with the Junior miner and decides to help the Junior miner finance the miner. This will help ease any concerns the market might have about the Junior miners ability to get the mine into production. Mergers are also an opportunity if a merger does occur between two mining companies this will also cause a rise in the stocks price.

Favorable Exchange Rate-

This is more of an opportunity for mining exporting countries, when their domestic currency depreciates. When these miners are paid for their raw materials or assets the international currency is converted into an appropriate rate in their  domestic currency. If the domestic currency is low then the producer receives more when the international currency is converted resulting in more profitability for the mining company.

Changing Demand and Supply Conditions –  An opportunity can present itself when there are changes in the demand and supply conditions. If there is an increase in the demand for a particular resource then that may cause an increase in the price of that particular resource. There would also be opportunities on the supply side when there is a shortage of supply for a particular resource,  therefore if a miner was mining a resource that is in a shortage then the resource they produce becomes more valuable. This would increase the price of that resource and thus the profitability of the producer.

The basic timeline for mining companies

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Investing in Junior Miners Vs Major Miners

Junior Miners

ABOUT – These are companies that usually have a small amount of capital and mainly in the prospecting and exploration stage of mining. These mining companies are yet to begin any form of production on their mining assets, instead focus on surveying and undertaking feasibility studies. Most of the company’s success is in this stage and is dependent on the results of their feasibility study a successful feasibility study can make or break a Junior Miner.  To understand what makes a feasibility study successful in a particular asset like Gold Nickle or Silver click here 

Level of Risk
HIgh
Profit Potential
High

Major Miners

ABOUT – These are companies that usually have a large amount of capital and already have a well-established mine in operation and are in the production stage. These mining companies producing and shipping their assets to refiners and buys of those assets. These companies focus on operations on their current mine logistics and other operational activities. They can be impacted by the changes in commodity prices and exchange rates. It is common for a major miner to form a joint venture with a junior miner after a successful feasibility study or an outright buy out.

Level of Risk
Low
Profit Potential
Low

Alternatives to investing in specific mining stocks

Mining ETF’s are a great way to get some exposure to the rapidly growing mining sector. An ETF or exchange-traded fund is a fund that invests in a variety of mining companies. You can invest in an EFT and not have to worry about individually picking and selecting mining stocks.  Below is an example of a mining EFT if you’re not sure where to look.