Thursday, February 09, 2006

Special risks when investing in a mining company

In addition to the usual risks involved when investing in a stock of given company like: mismanagement, corporation frauds, dilutions, Etc. Investing in a mining company carries specific additional risks:

1) Mining is depleting business, the more you mine the less reserves you have, unless you explore and find new reserves fast enough.

2) The revenues are completely dependent on the market price of the metal and the mining company is a price taker.

3) Hedging, some mining companies have sold some of their future production through the futures and derivatives market. They have sold in much lower prices, so higher metals prices do not always translate to higher revenues and higher profits.

4) Geo political risk, as the prices of metals are going up it is tempting for government to increase mining taxes. Under some circumstances mining licenses could be frozen or canceled.

The conclusions are: the price of some gold and silver mining stocks could outperform and give better appreciation then the price of gold and silver, but the risk is also higher. Be sure to do a good research before putting good money into any stock and don’t place all your eggs in one basket – diversify.
If a gold or silver company has only one mine or no production at all the situation is even more risky as is the case with exploration companies.

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Saturday, January 30, 2010 9:37:00 AM  

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