A Look at Mining Stocks and Where to Find Opportunity
Look around the room you’re in, with the exception of your cup of coffee and whatever you may be eating; almost everything came out of the ground at some point. This includes the wires you can’t see in the walls, the ring on your finger, and the minerals in the battery of your phone. Demand for these elements isn’t going away. And it’s no secret that the need for many is growing. This includes minerals used for power storage, gold purchased by cautious investors, and uranium which is expected to fuel modern reactors.
From an investor’s standpoint, this provides opportunity. But the mining sector is a bit different than others, especially the smaller, high-potential mining stocks. Stock selection relies on an understanding of the company, its opportunity, and also what minerals it is involved in. The demand for these materials, which make everyday modern life possible, does rise and fall with new inventions and global demand for growth. But, demand is never expected to dry up. In fact, it could be said that with each passing day, there’s an incremental but growing scarcity of natural resources.
Precious Metals
Gold and silver have traditionally been stores of value. The flood of newly minted money as stimulus during the pandemic, and the difficulty central banks are having reducing the expanded supply of money, have caused inflation. As world currencies lose value, gold and silver tend to go up in value versus traditional money. For mining stocks, a rule of thumb is as long as it costs less to pull the metal from the ground, than the value of the element, company value is inclined to move in the same direction as the element. Silver, for its part, is also considered important in manufacturing many solar panels and is an industrial metal as well as decorative.
Base Metals
Base metals are essential for building infrastructure, the value of the metals and often the mining stocks associated with these building blocks rise and fall with economic activity. Iron ore, for steel, is the most mined metal. It’s critical for bridges, buildings, and pipelines.
Aluminum is second on the list of most mined metal; while we are familiar with household uses such as foil and beverage cans, its light weight, strength, and rigidity make it critical for aerospace, automotive, and marine applications.
Copper is also considered a base metal, critical in infrastructure growth because of its conductive properties.
Base metal mining stocks are often looked at when world economies are committing to growth, or when they have come out of a period of low growth and are expected to return to a more normal pace.
Battery Metals
Renewable energy is creating more demand for copper and some non-base metals. This has been a big recent driver of interest in mining stocks. The renewable energy sector will continue to grow demand for storage and transmission of power.
The expected demand makes sense, but in terms of numbers it is very compelling. For example, to build a wind turbine with a capacity of three megawatts it will takes 335 tons of steel, 4.7 tons of copper, 3 tons of aluminum and more than 700 pounds of rare earth minerals – plus other materials such as aggregates.
A conventional power plant requires fewer metals, about one ton of copper is used in a facility that can continuously produce one MW of power. The trade off being the non-renewable fuel used to generate electricity traditionally. But, for now renewable energy sources require more metals, the sector is experiencing planned growth, this accelerates demand for these materials.
Electric vehicle production also uses a significant amount of materials from the mining sector. For example, an electric car requires four times the amount of copper to build. Lithium (used in electric car batteries) is being consumed at a pace near the capacity to pull it from the ground and process the mineral. By 2050, analysts predict that consumption may be up to 170% above currently known lithium reserves. This assumes no change in technology. There is a lot of speculation about how this will be handled and where the raw materials will come from.
If the reasons listed above have not yet convinced you to focus some of your exploration on investing in mining stocks, then let’s see what additional benefits may come from select companies and summarize them below.
Why Investors Allocate to Mining
Goods that will continue to be required, even in times of crisis will always have some level of demand. Those that are looked at as important to the future growth of the world economy have an even stronger underlying argument.
If one is looking for exposure to the EV market and expected growth, selecting a car company out of the dozens that are popping up both from the traditional automakers, and new entrants could cause a watered-down investment in the new demand for the building blocks. While an investment in mining companies may not seem as sexy as one in a company that makes state of the art vehicles, the underlying building blocks are what will be in most demand.
Stocks allow the possibility of capital gains not possible from investing directly in gold or a gold ETF. Depending on the stock there may even be the opportunity for dividends or royalty payments.
There is the ability to diversify into stocks that cover different parts of the economy. In addition to what was mentioned above, there are coal miners, uranium miners, cobalt, and pretty much everything else that comes out of the ground.
Each March there is a large mining conference that takes place in Toronto. The Senior Natural Resources Analys from Noble Capital Markets was there a few weeks ago and is presenting on some of what he learned. At the same time he’s meeting with a dozen mining companies that were in attendance.
Whether you are a veteran investor in this sector, or new and wishing to absorb as much as you can from Sr. Management of mining companies, register for free here to attend this online discovery event.
Managing Editor, Channelchek
Sources
https://www.investopedia.com/ask/answers/040815/what-criteria-classify-company-junior-gold-miner.asp
