Commodities investing can be intimidating, but many market watchers believe now is a good time to get started.
Many people have read little about commodities investing since the 1997 collapse of Bre-X Minerals. But the junior mining industry has changed, and opportunities for investors abound.
The Bre-X Minerals scandal was something of a wakeup call for those involved in junior mining stocks. Thousands of investors all over the world lost billions of dollars in the aftermath of the event, and the entire small-cap space was painted in a negative light.
Stories of past failures were brought to the surface, and every junior mining company, legitimate or not, was placed under the microscope. Many were unable to gain financing in the newly hostile environment and dropped off the map.
That drought in financing lasted almost a decade. However, even as junior mining companies suffered and commodities prices remained low, the economies of developing countries continued to grow. Many of those countries — such as China, India, Brazil and Russia — have now emerged as economic powerhouses, and they are hungry for commodities like never before.
Another positive trend during that decade was the modernization of the junior mining space from a regulatory perspective. Among other things, the Canadian Securities Administration, a forum for the 13 securities regulators from the country’s provinces and territories, created guidelines for how companies must disclose scientific and technical information when exploring for minerals.
Guidelines now exist for everything companies say about their findings, and companies must have what they say vetted by external, independent organizations.
Given those sweeping changes, many investors curious about the mining sector are wondering whether it’s now safe to invest in junior mining stocks. And for many market watchers, the answer is yes. The resource sector is currently recovering from a bear market, and the overall consensus is that a lot of companies creating shareholder value on the stock market are priced well below what they are worth.
The chart below from TradingView gives some idea of where the market is at right now. It shows the performance of the S&P/TSX Composite Index (INDEXTSI:OSPTX) from January 1, 1990 to September 5, 2019 — many junior miners are listed on the index, and when it’s trending upward it’s generally a sign that commodities are doing well, too.
Chart via TradingView.com.
That said, it’s important to remember that junior mining and junior exploration companies inherently come with a fair amount of risk attached. The success of any company depends on whether it can find the metals or mineral it’s seeking through exploration, and then if it can sell and ship them to buyers for a price higher than the cost of production.
Those things depend not only on the cost of setting up mines and processing ore, but also on the market price for the commodity being sold and the mine’s proximity to the market it’s selling to.
There’s also the factor of asset management that needs to take place within mining companies. Even with a strong asset, a promising mineral resource and a decent market cap, a company needs to play its cards right to maintain investor trust and see worthy cash flow.
Like so many entrepreneurial situations, myriad things can go wrong.
But of course, there are also significant opportunities for profit in mining stocks, and many investors are looking for a piece of the pie. Some hire experts to manage their capital, while others decide to go the extra mile and investigate in hopes of finding great resource stocks themselves.
Every investor, however, can rest assured that the mining sector has progressed to the point that the information companies release has been reviewed by experts in the mining industry who stake their reputation on its accuracy.
This is an updated version of an article first published by the Investing News Network in 2008.
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Securities Disclosure: I, Olivia Da Silva, hold no direct investment interest in any company mentioned in this article.