Don’t Be Afraid of Mining Stocks; Just Make Sure You Own the Right Ones

mining stocksIt would be great if there was a major correction in precious metal prices, so investors could have a better entry point for new positions. This sector continues to offer some of the best opportunities for speculators, although a lot of the returns now are incremental. I like to buy low and sell high, which usually takes more time and means going against the crowd.

There are, however, some very attractive mining investment opportunities in this market. I think this sector will experience a major consolidation in 2011 as companies seek to bulk up on production. A mine can only produce what it has in the ground. A corporation that wants to grow its earnings must therefore acquire new mining assets to serve its shareholders. Rising spot prices for precious metals are very helpful, but miners need to merge with each in other to create economies of scale for the bottom line. This industry is very well positioned for merger and acquisition activity going forward and most mining companies are flush with cash. Institutional investors are also very interested now and this makes doing deals much easier.

I would own a couple of individual mining stocks in a balanced equity portfolio. One would be a senior producer, and the other a smaller player with potential for a takeover. And you don’t need to own just gold stocks. Copper is another valuable precious metal that is benefitting from China’s economic growth.

The problem with speculating in mining shares now is that most of the best companies have already gone up in price on the stock market. Many precious metal stocks have moved dramatically higher, just in the last six months. This makes the pool of attractive assets much smaller. In addition, most of the known gold producers are trading at what I consider to be lofty valuations.

As I’ve been writing for a while, the value in the equity marketplace for speculators is in U.S.-listed Chinese shares. This doesn’t mean that you can’t consider new positions in precious metals; only that your risk profile is different.

I’ve learned that an investor doesn’t need to load up on a number of stocks in a sector in order to do well. A couple of good stocks in an attractive sector of the equity market are usually all an investor needs to outperform. I would be a buyer of precious metals stocks in this market, but only of the very best names with significant institutional following. If you consider all the global fundamentals, including high government debt, the outlook for interest rates, the U.S. dollar, etc., it’s pretty easy to make a case for higher spot prices in gold, silver and copper. This makes speculating in this sector uniquely attractive, even though it’s already gone up.