Hot Features
Premium
Trade smarter, not harder: Unleash your inner pro with our toolkit and live discussions.
Sometimes investing makes you smile. Other times it can make you want to jump off the nearest tall building. Although certainly not the only sector that can take you through those highs and lows, mining provides a pretty good example that investing is not for the faint of heart. Take these recent headlines, for example:
- “Fed Pledge Lifts FTSE As Mining Shares Tick Up” ~ 19 September
- “FTSE Lower as Miners and Banks Fall” ~ 20 September
Do you see what I mean? As much as, or more, than any other sector, with the possible exception of oil & gas production, mining is a volatile business with ups one day followed by downs the next. Nonetheless, mining can be an excellent investment, and after I explain a few of the problems you’ll face owning mining shares, I will tell you why it can be a very good thing.
Typical Mining Issues That May Drive You Crazy
- Large upfront costs of doing business. The best time to invest in a mining company, in my humble opinion, is early on, when the shares are relatively cheap. They are cheap because the new venture is typically raising money so that it can invest it in the capital expenditures and operating costs required to achieve their goal – which, by the way is not mining. It is making lots of money by extracting something from the ground, where it is worthless, and selling it for a profit to a market that, hopefully, has a huge, unmet demand once the raw product has been extracted.
- Capital Expenditures. Mining is expensive and the price of everything from iron ore to platinum fluctuates. Since the mining companies have no control over the price of their commodity, they must control the expense of bringing that commodity to the surface. The cost mining an ounce of gold, for instance, remains fairly constant. When the commodity price is high, the company can pretty much do as it wishes. But when the price comes down, there are really only two practical ways to cut costs: cut back on the mining itself and cut back on capital expenditures. Depending on the size of the mining company and the number of mines it is working, they can cut back hours of operation across the board or shut down one or more operations entirely – or any combination of both. Either typically lead to potentially unsafe working conditions or labor issues. Whilst this dynamic is certainly not limited to mining, it is typically more volatile than in manufacturing.
- Legal Issues. Licensing, labor and environmental issues plague the industry, often to the extent that when something good is about to happen, one or more of these issues rises its ugly head in opposition, causing a halt in the progress that had been expected.
The Best Way to Prevent Being Driven Crazy
If the mining sector prove anything, it proves that there is a way to invest that does not have to cause either angst, angina, and asylum residency. It’s the day-in and day-out issues that are tumultuous. So you should never own a mining stock if you are going to worry about what the headlines said on September 19th and 20th, or any other days.
Investing in a mining stock is a commitment. It is buying a ticket, getting on the bus, and staying on the bus until it reaches its final destination. It is not about the route the bus takes, because their may be unexpected detours. It is about arriving at the destination. Your part in getting the bus to that destination is to sit back and leave the driving to the driver. You don’t even have to worry about anything along the way. Don’t be unnerved if the driver turns left, and don’t feel better if he turns right. Just relax and enjoy the ride.
My point is this: Do not buy mining stocks if you are going to be a player in the market. But, most certainly DO buy them, if you are going to be a true investor, one who is in it for the long haul. Mining is a poster child for the long-term investing principle known and buy-and-hold, a principle that, when adhered to as a lifestyle, is far more likely to produce interim satisfaction and greater long term rewards.
