— “Ahead of the Street” Column, by Mitchell Clark, B. Comm.
If you’re an investor in individual stocks, you know that you’re taking a risk with your capital. You are, in effect, making a bet on a business’ ability to generate earnings. You can crunch all the numbers and consider the market’s sentiment, but in the end the most important question to ask is whether or not this is a good business to be in.
In a recession, the tire business may not be that great a business to be in. However, selling computers and software to dentists and doctors might be. In a recession, the parcel business might be slow. However, building power plants in China might be a booming industry. So, the single most important question to ask after you’ve done all the financial analysis is whether or not this stock represents a good underlying business to be in.
Right now, there are only a few really good businesses to be in. Selling IT security products to the U.S. government is a good business to be in at this time. Building electricity generation plants in China is also a good business to in. In addition to these investment themes, there’s one more industry that’s a great business to be in right now: the mining industry. It’s also a business that very few of us know much about.
The fundamentals for the mining industry couldn’t be shaping up any better. Big mining companies are awash in cash and, aside from buying back their own shares, there’s only one other thing they can do with all their money — acquire junior mining companies. Even if the price of gold (or other precious metals) stays where it is over the next few years, the price is still strong enough for most miners to be enormously profitable.
In the 2009 fiscal year, most mining companies are set to report record profits. And because share prices have been strong throughout the industry, mining companies don’t need to worry about borrowing money from reluctant banks. They don’t need to, because they can issue new shares. Equity capital is all they need to expand their operations.
If I was a full time equity speculator right now, I’d be focused on U.S.-listed Chinese stocks and junior mining companies. The current environment makes it a great time to be speculating in junior mining companies, because global fundamentals support the price cycle in precious metals and a lot of companies have good balance sheets. Furthermore, the big miners are sitting on loads of cash, with very few new places to invest. You can expect a lot of new mergers and acquisitions in the mining industry over the next few years.
Speculating in the mining industry has been and always will be more of an art than a science. At the junior end, there can be a lot more hype than reality. But, in this economy, the timing is right for the junior mining industry and I think it’s going to be a great business to be in for the next few years.