Commodities should be easy to profit from because they are cyclical; their peaks and troughs are often evident, and, strangely enough, there are counterparties prepared to sell assets at a loss when times are hard. Two crucial conditions have now been met. First, the prices of metals and Mineral Claims For Sale are about to reach their lowest point in the price cycle. Second, assets are offered for sale at bargain rates. Certain distressed assets may provide very good value, but you must be extremely picky.
Retail investors have a hurdle since they can only purchase company shares and cannot purchase mines.
So, today's topic will be how to use value investing ideas to invest in mining firms. It combines two issues we care deeply about, and mining is worthwhile and profitable.
We can't do justice to the depth and breadth of the value investing concepts in a brief post, but if you'll indulge us, allow us to set out a few straightforward guidelines that should be followed.
Describe how you see future expenses
Low costs are preferable since they indicate more resilience at the inevitable low times in the commodities cycle and imply more inherent worth. Yet we prefer a well-managed company with high-cost assets that can provide outstanding long-term returns to a company with high-cost assets that spends all its revenue instead of paying it back to shareholders.
Analyze earnings based on long-term average pricing and reasonable expenses for moving materials
A unique problem in determining the value of a mining asset or firm is the volatility of mineral prices. Consensus projections should be disregarded since they are based on the most recent impressions. We advise using the real price average for the last 20 years unless you have a specific opinion. Avoid being misled by short-term expenses since these can be impacted by over-grading during lulls or over-exuberance during peaks.
Instead, utilize sustainable average costs for material movement over the previous three years.
Choose businesses with less debt
We favor mining businesses with low debt to equity and low debt to earnings because of the unpredictability of commodities prices.
Examine the board and management members consciously
We look for a track record of shareholder returns and a disciplined history of successful capital allocation across the cycle. The ability and expertise of the board and management to "consolidate" assets at the appropriate stage of the commodities cycle should also be considered by investors.
Conclusion
Others claim that because future revenues are uncertain, mining businesses of mineral claims for sale need to fit inside the value-investing paradigm. We don't agree, and we realize that it is challenging to forecast future income due to the inherent volatility of commodity prices.
However, many aspects of mining operations are highly reliable and predictable. For instance, production tonnage and expenses from a mine with a solid reputation and a skilled operations team are predictable. One method to get around the challenge of creating a trustworthy, unbiased price estimate is to use a long-term actual average price as the foundation for future revenues.
