Mining stocks are much more attractive than holding gold coins and bullion these days. Given the price of gold and other precious metals it seems like standing against a high speed train when buying into these metals. The following steps offer a great guideline to benefit from the mining stocks.
1. Management:
Mining is a very specialized field of engineering. Most Junior mining companies are led by engineers and specialists with little or no management experience. It is one thing to know the technical side of engineering and running a company profitably is a totally different skill set. See if the company has completed projects in the past. Get an accountant to review their financial statements. All in all go for companies that have a strong balance sheet and a strong retail support.
2. Money:
Mining is an expensive sport. Normally the company burns through a lot of cash before they see anything fruitful in terms of earnings come through the door. Acquiring reserves is a great starting point for these companies to establish credibility in order to raise the cash necessary to mine these reserves.
When companies burn through cash every month to support their operations, savvy investors study trends in the burn pattern and estimate how long it would be before the company would run out of cash and seek additional financing.
Exploration reserves are usually valued at about a third of the reserve values. Savvy investors never pay more than twice the cash per share if they are not certain that there is gold in the ground.
3. Price Action:
Savvy investors follow price action like a hawk. In general, mining activity and more importantly market reaction to mining activities occurs in small bursts. For example, stock price may go up when exploration plans are announced or exploration results are received. After a while prices settle in and plateau out until the next major news. Prices also adjust heavily when wealthier investors take a large long or short position. Such sporadic gyrations can leave investors somewhat nervous about investing in mining stocks.
4. Market Cap:
This is the stock price multiplied by the number of outstanding shares. There are different breakdowns for different precious metals regarding their market cap thresholds. However, there are 3 gold sectors by market cap:
a. Seniors: Market Cap above $10 billion
b. Intermediates: Worth between $2-10 billion
c. Juniors: Worth less than $2 billion
A gold company with 20 million $1 shares is said to be worth $20 million but you need to look closely to see if this is the case. If a company can receive $35 an ounce of gold to be mined from the market and there were 1 million ounces, this would put the true worth of the company at $35 million which means it is undervalued. Conversely, the company would be overvalued if it was valued at $45 million. Bigger gold companies need to be measured against its geographic location amongst other things. Junior companies should have their balance sheets examined.
Learn more about Investing in Precious Metals. Find out all about trading in Precious Metals Mining Stocks.
Tags: investments