Investing in Mining 101

Mining stocks can generally be divided between the majors and juniors. The majors are typically mining companies that operate producing mines on a global scale and have proven methods for consistent output year over year.  In reviewing these companies as potential investment opportunities, looking at their operating track record, revenue and profit performance, as well as their regional and macroeconomic risks are important, much like other stocks.

Junior mining stocks, on the other hand, are usually smaller companies and take on risky mining exploration. If a junior mining stock is successful at finding a mineable mineral deposit, it can mean huge returns for investors.  Junior mining stocks offer the investor with the potential for significant growth, given the speculative nature of the investment.

Keep risk in mind with junior mining stocks.  Even though junior mining stocks have strong profit potential, they entail higher risk than more established mining companies, for a number of reasons.  These stocks are generally suited for your high risk and high return portion of your portfolio.

For one, the odds that the companies behind junior mining stocks will find an “anomaly,” or a geological formation that might attract a prospector’s interest, are slim. One rule of thumb is that you have to look at 1,000 anomalies to find one prospect. And fewer than one prospect in a thousand turns into a mine. In other words, finding a mine is a million-to-one shot. Many investors use junior mining stocks in a similar way to how venture capital investors invest in start-ups: they make small investments in numerous companies so that each individual investment, while risky, does not greatly affect the value of the portfolio if it fails, but a major success in any single investment can provide significant growth.