Mining stocks should occupy a prominent place in the portfolio of investors with a medium and long-term perspective. But before investing in the best mining stocks, you need to understand the nature and risks of this sector.
What is the attractiveness of this sector?
So why should investors be interested in a sector that seems so unattractive at first glance? There are many reasons. Stocks in this sector should benefit from structurally bearish supply amid demand that remains, or even increases in some cases (when metal prices are likely to rise), favorable macroeconomic factors, and valuation levels. As you can see, such shares are attractive in the long term.
Is it risky?
Shares of mining and metals companies are often subject to fluctuations, such as those associated with the prices of precious and base metals. We can look back to the great peak of 2011 – a year marked by an all-time high for the price of gold – when mining stocks were quite attractive, with a long decline until early 2016 followed by a rally. Therefore, investors should choose the moment for investments quite responsibly, and constantly monitor shares, for example, through the Gainy service.
Resource-based mining companies rebounded strongly amid renewed hope on the economic front. Likewise, fluctuations in the market are also felt by these companies.
As for gold mining stocks, they have already begun their correction after a formidable rally from March to May. Note that in the event of new fears about the economy, gold could serve as a safe haven, which would benefit gold mining stocks, but not industrial mining stocks.
An industry that has cleaned up
The history of the mining industry is disappointing. We can see that cyclically is important, capital needs are significant, and capital allocation is rarely relevant. As you know, in 2015, the sector experienced the worst crisis since the 1930s. Most of companies have undergone restructuring, and the shareholder return policy has become more in line with investors’ expectations. Also, against this background, companies have less debt and better allocate their capital.
Copper and nickel will benefit from the future boom in electric cars and green energy
This is true for many metals as new needs arise. Thus, the development of wind and solar energy, as well as the democratization of the electric car, require very large amounts of copper or nickel. A car with an internal combustion engine contains about 20 kilograms of copper, which is 3 times less than in a 100% electric car. For a nickel, a necessary component of the battery, the differences can vary from 3 to 30.
5 reasons to invest in gold in 2022
Consolidation of sector companies
In recent years, there has been an intensification of consolidation operations in the gold mining sector. The last major restructuring operation dates back to September 2021 with the merger of Agnico Eagle and Kirkland Lake Gold. Through the merger, the two companies give birth to a global giant that is expected to be worth more than $30 billion on the stock market.
Gold supply is in short supply, which can push up the price of gold
The current gold reserve corresponds to about 16 years of production (compared to almost 50 years for oil)! The yellow metal also does not seem to have been the subject of major discoveries for nearly 25 years.
Investing in gold through gold stocks to take advantage of leverage
Leverage is an effective (but risky!) way to increase investment efficiency tenfold. Gold companies often resort to debt. In the case of a strong rise in the price of gold, gold companies should therefore logically take advantage of the rise in the price of the yellow metal.
Weakening of the dollar
The price of an ounce of gold is traded in US dollars. This means that when the US dollar depreciates, the price of an ounce of gold rises. Many investors expect the weakening of the US dollar against the background of the global crisis.
Inflation has reached unprecedented levels not seen in more than 30 years in the United States with an annual rate of increase in prices for American consumers of 6.20%. The return of inflation will undoubtedly prompt central banks to raise key interest rates sharply. It is very likely that the tightening of monetary policy will prompt investors to rush into such tangible investments as, for example, gold.
International geopolitical tensions often push the price of gold
Fears of escalating geopolitical tensions between China and the US often push the price of the yellow metal to unprecedented levels. Investors are looking for safe assets such as ETFs that specialize in investing in gold.
Indicators to watch for investing in a mining company
In order to invest in gold through a regulated company specializing in the exploration and production of precious metals, it is important to track certain indicators.
P/E ratio
The P/E ratio is an important financial indicator. This metric is very simple, it is simply the stock market price divided by the net income of each share. The average indicator in the gold mining sector is 11.10. This indicator is not sufficient for an effective evaluation of the company. A company with a P/E ratio above the industry average is not necessarily overvalued.
Business model: direct exploitation or royalty
Direct exploitation of the properties of gold means higher operational risk. The royalty business model appears to be less risky, but the stock market values companies operating under this business model quite well. However, we can monitor the signing of new royalties from some companies (such as B2Gold for example).
Internationalization and diversification
Heavy dependence on a geographic area is risky. Local laws may change, and some countries in particular are subject to political risks (such as some South American countries). An unscrupulous government could, for example, order the requisition of mining facilities.
These are simple investment tips, but you need to actively monitor current inflation as well as the overall level of production in the gold industry. Also, remember that the cost of mining an ounce of gold plays a large role in the profitability of a gold company.
