How to Buy Mining Shares

Mining companies are involved in the discovery and processing of mineral deposits from precious metals like gold and silver and resources such copper, uranium and salt. To help finance these operations, most miners issue shares on publicly traded exchanges. When the value of the company's commodity reserves rise, miners typically experience expanded profit margins and increased earnings. However, because mining involves inherent risk, many factors other than the price of commodities often impact the value of mining shares.

Difficulty: Moderate

Instructions

Things You'll Need:

• Capital to invest
• Stock broker or online brokerage account

1. Before purchasing a single share, decide how much money to allocate to a position in gold-mining shares. A common rule of thumb is to have a minimum 10 percent of a portfolio in precious metals, but because of the other risk factors particular to mining companies, less than half of the precious-metal allocation should be mining shares.

2. For some, a single large cap mining company will fill the mining allocation in their portfolio. These global firms usually offer stable, if slow, growth and a safe dividend. Other investors may choose to diversify within the mining sector to minimize company-specific risk or speculate in younger, unproven companies. Factors to consider in choosing mining stocks are debt, cash flow and mineral reserves. Junior miners may have an impressive list of properties but will have to assume significant debt to initiate actual production. Exploration companies sink or swim on their ability to locate commercially viable ores they can sell or lease to larger companies with means for production.

3. Use ETFs and mutual funds. Those less confident in their stock-picking skills should use one of several gold mining funds that track a basket of gold miners. The most popular of these are the AMEX Gold BUGS Index, trading as ticker symbol HUI; the Philadelphia Gold and Silver Index, XAU; and the Market Vectors Gold Miners ETF, ticker symbol GDX. A number of mutual funds concentrated in gold-mining shares are also available.

Tips & Warnings

• Mining companies tend to flourish when capital is cheap and easy to acquire. Not only does this lower their costs, but it produces an inflationary environment that raises the nominal value of their reserves.
• Mining tends to move in a cycle where activity is low while commodity prices are low, which reduces supply and drives prices higher. As prices rise, more miners are able to produce, which ultimately increases supply and reduces prices. Investing at the bottom of the cycle is the best way to make long term profits.
• Read the company's quarterly and annual reports. Know where its mines and other facilities are located and what the potential risk factors may be. An experienced, successful management team is also usually necessary for a profitable mining venture.
• Miners, particularly ones with global reach, are subject to production shortfalls, fluctuating energy and labor prices, labor and governmental disputes, and environmental and other lawsuits. These risks can affect stock prices without warning.

Resources

• Resource Investor
• Base Metals Prices