Blog

Are You Mining for Investment Income?

So, you have heard about the potentials of investing in the mining industry, and it has piqued your interest as an investor? Mining for gold and other precious metals has a long history full of intrigue, adventure, risks, as well as fortunes made.   

But before investing your hard-earned money into this sector, it is best to understand not only the benefits but also the risks involved in the mining industry.

Overview

Mining companies extract valuable minerals from the earth for economic benefit. Even though this sector has had its share of highs and lows like all other industries, it is still a big business. Most commercial products contain components that are sourced through mining.

To be sure, there are critics, as there are concerns about its damaging effects on the environment. Yet, it has always been an attractive investment for investors as it provides steady income generation. 

As with any industry, mining entails risks. While it is possible to get high returns, the risk of losing is just as high. There are instances in which some metals or minerals, such as silver can shift in a direction completely, so it is important to keep a close eye on your holdings.

Mining stock groups

stock-exchange-board

We can split the mining industry into two primary groups:

  1. Major groups

Member companies of this group are well-established organizations with deep pockets and decades of history. There is not much difference between the major mining companies and large oil companies. Both have similar metrics and are easy to access for investment.  

  1. Junior groups

Juniors are relative newcomers with small capital but with dreams of hitting it big someday. Historically, the most common outcome for junior mining companies is a failure, which means a loss for everyone who has invested. Another possibility is that a junior firm will have the moderate success that would lead to a decent payday. A few do make it big by discovering large deposits of a very in-demand mineral. Such cases are as rare as hitting the lottery or finding the proverbial “gold-mine,” though.

Investing in major or junior mining stocks 

This depends on your objectives. If you wish to be on the safe side and are content on simply getting a decent return, then you can go for major mining stocks. If you are a bit riskier, you can look for junior mining stocks. Remember the higher the risk, the higher the rewards.

Tips on how to invest

  1. Generate a list of ETFs that invest in mining firms. ETFs or exchange-traded funds and are the fastest way to diversify your portfolio. In your effort to research and monitor companies, this can simplify things. There are two types of ETFs: general mining and specialized ETFs. You can find ETFs through an ETF database.
  2. Examine how the corporation’s stock changes with the principal metals it produces and sells. When doing your research, remember to use standard business benchmarks, like profit margins. The only difference is that mining companies produce and trade metals. If there are changes in the price of the metal, the price of mining stocks will quickly react. Understanding this relationship will help you spot important events.
  3. After you have examined and understood the stock, monitor the mining company and the metals. Purchase the stock and then watch for any important developments.

Risks facing the mining industry

mining-exploration-activities

The mining industry is always vulnerable to changes in the global economy, trade deals, politics, and changes in laws, due to its very nature. 

  1. License to operate

One of the biggest obstacles mining companies face is getting a license to operate. This industry has found itself with plenty of opposition from environmentalists. Mining companies need to evolve and be mindful of the changing public mindset toward mining in society and how it is likely to impact legislation. A wrong move can jeopardize future attempts at getting a license.

  1. Knowledge of the digital landscape

We are at a time where almost everyone is going digital, and digital effectiveness has never been as important as it is now. Unfortunately, a lot of mining companies are late to adapt to the current digital landscape. A company’s ability to improve its digital effectiveness will be a major factor in whether it will remain a dominant player in the industry or not. 

  1. Cybersecurity

Mining companies need to bolster their defenses against cyber criminals and hackers. As firms learn how to participate in the digital environment, they become more vulnerable to attacks, whether intentional or unintentional. The results can be disastrous. Impacts on the company include damage to reputation, safety incidents, liability claims, and widespread outages. Companies will need to have sound cybersecurity strategies to prevent such negative impacts.

  1. Human resources

Mining companies hire massively during peak seasons and then let go of extra manpower during low seasons. The problem with this is that the people they let go, whom they invested in with training, move on to other sectors. This creates a vacuum, and the cycle of hiring and training starts all over again.

Another problem is attracting fresh talent to the mining industry. Millennials are not organically drawn to working in this industry, so building a team of the future is challenging.

  1. Demand for New World commodities

Along with the improvements in technology comes the demand for environmentally friendly products. Focus these days is on recycling, which lowers the demand for some metals. Understanding how to balance the New and Old World product demands is a daunting task in this day and age of environmental awareness. While this can be seen as a negative, there are also many not so well-known minerals that are mined and are high demand necessities for emerging technologies such as in the manufacture of computer microchips, processors, circuitry and robotics industries.  These segments offer huge demand and income opportunities for mines of the future.  

  1. Governments pose a risk too

Due to its effects on the environment and to the surrounding communities, mining is a highly regulated industry. Sometimes, governments protecting their national interests can be overly burdensome to mining operations. Regulations can sometimes make it hard for mining firms to operate or earn high-profit margins.

Conclusion

Metals and minerals will still play a vital role in the global economy for years to come. While some metals and minerals may lose steam in the next few years due to the popularity of renewable energy, other minerals, especially those used in the manufacture of computer components will likely take their place. Coal is one example of a top mineral that would likely level off in terms of demand, while copper is seen to be on the rise since it is an essential component in the solar and electric vehicle industries.

 

As you can see, the mining industry is not for the weak of heart, as it is fraught with complexity and a high-change environment.  Yet due to its global importance, mining will continue to expand and evolve in the future. This growth will allow mining firms to continue to offer value to investors, of course, that is so long as they operate wisely and keep eyes forward to the future.