Almost every commercial product contains elements that were once buried beneath the earth. This makes mining a big business. The speculative nature and geological uncertainty of mineral deposits means that investment in junior mining offers the potential of huge return. It also carries huge risks. The following is some information to be aware of before adding mining stocks to your portfolio.
- Know the value of the mining company: Junior mining companies are difficult to value. To accurately understand their worth you need to comprehend the three stages of the junior mining life cycle. As the company progresses through the stages of its life cycle, it becomes less risky and rises in value.
- Exploration: During the exploration stage, a junior mining company has no studies or resource estimates. They are in a purely speculative stage where their success relies on making a new mineral discovery through drill programs. The upside, great drill assay results may cause your share price to skyrocket. The downside, bad drill results can reduce the stock price to ruins. Before investing, make sure the company has a fallback target or prospective projects in its portfolio.
- Development: Development-stage companies can be classified into two types
- Post discovery: Companies in this stage have recently made a discovery but do not yet know how large that discovery might be. The company will produce a 43-101 compliant resource estimate and then a more advanced desktop study to determine whether the resource can be mined economically.
- Near term producers: These companies are nearer to producing. They carry less risk than companies in the exploration stage. A great deal of the guesswork about grade, size, costs and metallurgy has been taken out of the equation. They’ve done the work to give investors an increased level of confidence that their project will successfully move towards the production stage. They may have three possible studies.
- Preliminary Economic Assessment (PEA) This study determines what the mine could be. It examines potential mining scenarios and economic parameters. This scoping analysis is an important milestone for a mineral project. It’s the first step in a company’s economic and technical examination of a proposed mine.
- Preliminary Feasibility Studies (PFS) This study determines what a mine should be. It’s more detailed than a PEA and is used to determine whether or not to proceed with a detailed feasibility study. A PFS is also used as a reality check to determine areas within the project that require more attention.
- Feasibility Studies (FS) This study determines what a mine will be. It definitively decides whether or not to proceed with the project. A feasibility study provides budget figures for the project and will be the basis for raising capital to build the mine.
- Production: When they reach this stage, companies are called mid-tier or majors. They are well capitalized, typically have decades of history, world-spanning operations and slow, steady cash flows.
- Value the Mining Stocks:
- It’s virtually impossible to value an exploration company as perception of and the prospectivity of the geology are quite subjective.
- For development stage companies, value the company using a discounted cash flow (DCF) model. It’s a comprehensive and detailed representation that takes into consideration capital costs required to run the operation and estimates the amount of future cash flow expected. This model requires an advanced desktop study (PEA, PFS or FS).
- A major mining company is the sum of all its deposits plus the goodwill tied to its history. A change in the market value of a mineral that makes up a large percentage of the deposits will have a much larger effect than a new deposit or a failed deposit.
- Choose Between Majors and Juniors: Whether you choose to invest in an aspiring mining company or major mining stocks depends upon what you’re looking for. Juniors have the potential to offer enormous appreciation, making them ideal for risk capital but not the best place to put your social security checks. Major mining companies generally are a lower risk stock class with the potential for dividends and moderate appreciation.
Before you invest in the mining sector, learn how to estimate the impact of pricing risk and understand the dangers of buying on a single positive assy. Do your research before adding a major or junior mining company to your portfolio.
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