Watch out for these 3 red flags when looking for mining stocks
If you are looking to invest in mining stock, or are thinking about investing in one, it pays to be thorough and do your research.
Mining companies have a natural tendency of being “high risk, high reward” investment vehicles. There is a lot of cash flow-based action happening in the mining world that can benefit an investor but it also comes with great risk if you come across the wrong mining stock.
So what are some of the red flags to look out for? Knowing the red flags you are looking for will help you avoid companies that cost you time and money. There are a lot of risks to investing in the stock market, and when it comes to investing in resource stocks, it is important to know what risks to watch out for.
These red flags can be used as a gauge for whether you should invest in the company or not. If you see one or two of them, then you may want to consider further research before jumping on the bandwagon.
Here are some of the things you should consider before investing in mining stocks.
Project History
A good place to start is by finding out about a company’s past projects. How many years has the company been in business? How many years of experience does its team have in the industry?
Successful mining companies are typically run by people with decades of experience. The more successful their past projects, the more likely they are to be successful in future ventures.
Red Flags:
If the mining company is involved in past projects that have already failed and they are planning to revive them again, there could be a good chance that they will fail again.
Moreover, if you will look at their project history, it is easy to spot their technical difficulties and incompetencies in the field. If you think that there is something wrong, chances are you are right.
Green Flags:
Successful mining companies are typically run by people with decades of experience. For this reason, it is best to see how many years has the company been in business. Read or ask about the number of years they working in the industry to see if they know what they’re doing.
Moreover, you should see if the company demonstrates its ability to successfully explore, develop and operate mines that are similar to the one it is proposing.
It’s important to understand what kind of mine a company wants to build and what it expects that mine will produce. A company that has built similar mines will have an easier time building another one.
Management
Another important factor to look for to ask when investing in mining stocks is the track record of the management team. Has it been involved with successful mining projects before? You can learn a lot about a mining company by researching its management team.
Management teams with experience building and operating mines tend to do so again in the future. It’s often said that if you can’t trust management, don’t invest in the company.
This adage applies to all companies, but it’s especially true of small-cap mining stocks where management can influence the company’s success to a greater degree than in large-cap companies.
Red Flags:
For example, it’s not uncommon for junior mining companies to be started by “promoters,” who are paid a fee to attract money for stock offerings. That’s not necessarily a bad thing, but it does call into question the management team’s motives and their commitment to the project.
Another red flag is when management has a history of promoting stocks that generally underperform the sector indexes or whose share prices have declined significantly after they were promoted as investment opportunities.
Mismanagement can also come in the form of shareholders getting very little information from management unless they’re actively raising money or making a significant discovery. If there isn’t an open and honest relationship between shareholders and management, then this is another warning sign that you shouldn’t invest your hard-earned money in the company.
Green Flags:
In terms of business operations, the company’s management team is of utmost importance. Good management teams should have experience in the mining industry and a good track record of bringing profitable projects into production on time and within budget. The company’s assets should also be located in stable jurisdictions.
Moreover, make sure that the mining company management has enough transparency to their investors. This will help you gauge the happenings in the company and see if your investments are worth it.
Location and Political Risks
Two of the main risks for miners are political and country risks. Political risk refers to the instability of a foreign government or currency, which can make it difficult to do business there. Moreover, if there is a great deal of political turmoil in a country then it may affect operations and the company will not be able to make profits.
Red Flags:
One of the most important things to look for when evaluating a mining company in the country where it operates.
Many countries are off-limits to investors, either because they’re too dangerous or they don’t offer adequate legal protection. You should not invest in a company that operates in a country you can’t visit.
Green Flags:
A mining project is a long-term investment, so it is important to make sure that the country where it is located is not only open for business but also has a stable government. This will help ensure that you have access to the country’s resources.
Moreover, the laws of the country must protect your investment so you don’t lose control of your property. A strong legal system also makes it easier to get permits and enforce contracts. If political instability leads to a change in leadership, how secure are your property rights?
You want to make sure that if there is a new government, your rights are protected through law or contract.
Key Takeaway
The mining industry has long provided the much-needed resources and minerals that we need to run our businesses and to provide services for our population.
There are, however, several risks involved with investing in these companies. This is why before you even select an industry or company to invest in, you should determine whether this is truly the best investment for you.
That said, there are also a lot of green and red flags that you should be aware of when investing in mining stock. If you pay close attention to these, you will be able to spot what to look for early.