Flooded with Cash: Where the Upside of Mining Stocks Is

There isn’t a conspiracy to have strong precious metal prices; it’s just that a lot of factors have come together to support these commodities around the same time. The mining sector is awash in cash and it’s a key area for equity speculators who want to make money from fast-growing junior producers and from the consolidation that’s now taking place.

With all the money floating around the mining sector, companies are reopening old mines and drilling for new deposits. All kinds of junior and intermediate miners are increasing their production and reserve forecasts for the future, so eventually the supply end of things is going to change. But right now, the demand is there and oversupply is not an issue.

Investing in mining stocks is somewhat different from other kinds of businesses, because, no matter how rosy the story, these stocks do have a tendency to trade with the spot price of the underlying commodities. At the very least, they trade with sentiment, which most certainly depends on whether the underlying commodity price is going up or down.

The upside for speculators in mining shares is similar to other types of businesses. If a company beats consensus estimates, then the shares should react. Plus, the additional cash flow can be used to go right back into the ground. But the real drivers of mining stocks are major new finds from drilling results and rising metal prices. You can make money speculating in explorers, but I recommend that investors in this specific sector focus on dealing with those miners already in production. Where there’s gold, there’s usually more of it around if you keep looking.

Most individual investors don’t like to work with a full-service broker, but if you’re speculating in the mining business with any degree of seriousness, it can be advantageous. A mining research analyst typically has visited a company’s actual mining site and has worked with management and engineers to create a reasonable production forecast, which is then used to estimate cash flow. There are a lot of strict rules about how mining companies execute and report their drilling results, so, while investors may think there are a lot of fly-by-night operations in the industry, the truth is that there are not.

Just like the stock market, precious metals prices have run up tremendously. I’ve been saying for quite some time that a major correction in metal prices would be a healthy development and an opportune time to consider new positions. Similar to the stock market, the good mining companies have already gone up in value, so the big capital gains going forward will come from mergers and takeovers, along with the new discovery of minerals. With so much cash floating around the industry and companies spending it on drilling, you can expect a lot of new discoveries over the coming quarters.

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