Gold mining stocks often play a key role in the savvy investor’s portfolio as an alternative way to invest in gold. When investors think of mining stocks, they usually think of gold miners — companies searching for and extracting gold. Investors often turn to gold mining stocks as a hedge against disaster while also being profitable investments. Uncertainty and fear in traditional stocks, as well as a weak US dollar, can drive gold prices (and, by extension, gold stocks) higher. Because their prices aren’t strongly correlated with the broader market, they can be a valuable source of portfolio diversification.
A benefit of investing in stocks in gold mining companies over direct investments in physical gold is room for growth. One ounce of gold today will still be one ounce of gold a century from now. While physical gold has held its value and buying power over the years, it is essentially unproductive in the sense that it will not multiply or grow.
Stocks in gold mining companies
One major disadvantage of a direct investment in gold is that there is no room for growth. If you put one bar away for safekeeping and retrieve it ten years from now, its value might have increased, but it is still the same bar of gold. The unproductive nature of physical gold is why some investors prefer to invest in gold mining stocks. The value of mining companies tends to track the prices of the commodities on which they focus. However, because miners run businesses that can grow over time, investors can benefit from the increased output. Being able to scale a company and potentially increase share prices provide benefits that investing in physical gold will never offer.
The mining industry is popular with investors because of its consistency — mining companies produce metals and other raw materials for consumer and industrial use where there is a constant demand. The sector is divided into two categories by investors: majors and juniors.
Junior miners are small, early-stage mining companies that have yet to mine any resources and are still in the exploration and development stage. In our article, Junior Mining Stocks- Potential for Massive Rewards, we dive deeper into junior miners’ benefits and return potential.
Majors are more established mining companies with extensive claims and capital reserves to fund future exploration.
Like companies in any industry, mining companies face risks, including commodity price fluctuations, geopolitical factors in the mines’ locations, and finding profitable geological areas to stake a claim. Overall, gold miners can outperform gold, depending on what’s going on at that particular miner.
Another thing to consider is that the majority of gold miners produce more than just gold. If you want to diversify your investment in precious and semiprecious metals, a miner that mines more than just gold may be a net positive. However, if you are only interested in pure gold exposure, every ounce of a different metal extracted from the ground dilutes your gold exposure.
When deciding which gold mining stocks to buy, potential investors should consider a company’s mining costs, management team, existing mine portfolio, and expansion opportunities at both existing and new assets.
When researching mining stocks, many focus solely on the main commodity that the mine produces. Whether it’s uranium, gold, silver, palladium, or any other natural resource, understanding the entire extraction process is essential for appreciating the asset.
Because geological factors create different mining environments, no two mining projects are the same. Because of the complexity of mine planning, the lifecycle of a mining project should be taken into consideration.
The 5 Stages of a Mining Project:
1.) Exploration
Exploration of gold mines is difficult and time-consuming. Exploration takes massive amounts of time, money, and expertise in various fields, such as geography, geology, chemistry, and engineering. Modelling the orebody and assessing its feasibility can occur once basic facts about the local geology and potentially viable deposit have been established.
2.) Development
The next stage of the gold mining process is gold mine development. It entails the design and construction of the mine as well as supporting infrastructure. Before beginning construction, mining companies must obtain the necessary permits and licenses. This usually takes several years, though it varies a lot depending on where you are.
3.) Construction
Construction might not be limited to the mine. Mining companies frequently build local infrastructure and amenities to support both logistical and operational needs, as well as employee and community welfare, in addition to potential processing capacity. This development is a significant source of long-term support for local communities, and it is one of the most critical ways gold aids economic development.
4.) Operation
The gold mining operation stage represents a mine’s productive life, during which ore is extracted and processed to produce gold. Processing entails converting rock and ore into a high-purity metallic alloy known as doré, which typically contains 60-90 percent gold.
Several factors, such as the spot price of gold or input costs, will influence which areas of an orebody are deemed profitable (economic) to mine throughout its life. Mining low-grade ore will become profitable in times of higher prices because the higher price will offset the increased cost of extracting and milling larger volumes. When prices are lower or higher costs, it may only be profitable to extract and process higher-grade ores. Mining companies review mine plans regularly as market conditions change and new technical information becomes available.
5.) Decommissioning
A mine will eventually cease operations, possibly because the ore body is exhausted or the remaining deposit becomes unprofitable to mine. The work then focuses on its decommissioning, dismantling and rehabilitation of the land it was situated. Closing a gold mine is time-consuming and involves many different parties and levels of government. Mining companies must also monitor the mine site long after the mine has been closed to ensure the safe transition back to its normal state.
Every billion-dollar project varies in some way (location, commodity, size) — however, the lifecycle explained form the backbone of mine development and a successful mining company.
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