In the context of stock Mining, it is often said that; If it isn’t grown, it has to be mined. Surely you’ve heard a proverb similar to this one before.
Users include those who are bullish on mining stocks and those who are worried about the effects of mineral depletion on the environment.
Mining is big business, and both of these groups are correct, though they emphasize different things when they say it. Almost everything sold in stores originally came from the ground up.
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If you’re considering investing in stock mining companies, here are some things you should know first.
KEY POINTS
- Investors like the mining industry because it consistently delivers a supply of metals with high demand in the industrial and jewelry sectors, as well as other raw materials.
- Majors and juniors are the two categories that investors use to categorize the sector.
- Exploration for oil, minerals, and natural gas are common examples of the types of commodities most commonly explored by junior companies.
- Majors have a larger portfolio of claims and a capital cushion that they use to finance exploration and, thus, are less volatile and more mature.
- Commodity price volatility, political instability in regions with active mines, and the difficulty of discovering new, economically viable geological formations are just a few of the many risks that mining companies face.
Two Groups, One Sector
Stocks in the mining industry can be broken down into two distinct categories: majors and juniors.
The majors have been around for decades, have operations all over the world, and generate a steady stream of revenue.
Large mining corporations are not dissimilar to large oil corporations, and many of the same metrics can be applied to them with a mining slant.
Although both industries have proven and probable reserves, mining firms typically calculate earnings and expenditures per ton of ore mined, rather than per barrel. Investing in and evaluating a mining major is simple.
When compared to the mining majors, junior mining stocks are nearly the antithesis. They typically operate with limited resources, have limited track records, and anticipate massive future profits.
A junior company is a young or small firm that is working to develop an untapped natural resource field or deposit.
There are three potential outcomes for the juniors.
- The most typical outcome is failure, which drains the resources of everyone involved (including lenders and investors).
- The other possibility is that a junior will achieve sufficient success to attract the attention of a major, which will then pay a fair price to acquire it, resulting in positive financial outcomes for all parties involved.
- The third and most unlikely scenario is that a junior discovers a sizable deposit of a mineral that is in high demand on the market. If this occurs, juniors may earn back more in a matter of days than a major would earn back in a number of years.
Putting Much Relevance on Major and Junior Mining Stocks
Despite their differences, all mining stocks share a common characteristic: their business models are predicated on depleting their in-ground assets. The catch is that miners never really know how much is in a deposit until they start digging.
Therefore, in stock mining, a mining stock’s worth is proportional to the market value of the company’s reserves, with a premium given to companies with a proven track record of commercializing their reserves.
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Feasibility studies are used to assess reserves. Such analyses provide unaffiliated confirmation that a deposit will grow in value over time.
A feasibility study involves weighing the potential rewards of extracting the deposit against the potential drawbacks in terms of both cost and difficulty. It is possible if the value of the deposit exceeds the cost of extraction.
We shall be discussing more on this in our next article. Keep an eye on this space and don’t forget to subscribe to our newsletter for the latest news and article.
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