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Making money in mining stocks?

January 27th, 2011 · No Comments

Here are 20 ideas…
20 ways to make money in mining stocks

ALLAN Trench answers a challenge to identify 10 ways to make money from mining stocks in 2011 – with a starting list of 20 – and asks readers to add to the list.

There’s only one sure-fire way to make money in mining and exploration stocks: to buy low and to sell high. But the devil lies in the detail, of course – it is less the “what” and more the “how to” that is the difficult part.

This week a colleague challenged your scribe to identify at least 10 ways to make money from mining stocks in 2011. So here’s a list of 20 potential ways to make money in order to kick the ball into play.

Can you add more? Given the list below is somewhat from the hip, I suspect there are many important omissions. Some of the techniques listed are resources sector-specific, while others are generic. Never being one to shirk a challenge, here goes:

1.Buy shares that are trading below cash-backing: the only way is up (eventually).

2.Trawl the market for takeover targets – you only need to get it right once.

3.Buy on first takeover bid – then hope the bid is contested.

4.Subscribe to discounted rights issues – and take the immediate profit.

5.Sub-underwrite capital raisings – you are paid for the privilege.

6.Become a dedicated follower of resources industry “fashion”: Mongolia is likely to be hot for some time yet.

7.Benefit from the floods – buy New South Wales and overseas coal producers, although it’s been raining in South Africa too. On that theme, don’t forget to donate some of your profits.

8.Invest in project developers (not just meaning Queensland) that will benefit from planned infrastructure upgrades: which companies get a free kick from future government expenditures?

9.Write cheques to multiple resources IPOs. When the market is hot (and in 2010 around 20% of resources IPOs more than doubled in price by year’s end), the prospectus is just the glossy bit in front of the application form.

10.Seek out ugly ducklings – the turnaround stories of the resources world.

11.Invest in the hottest things going around (gold in west Africa and rare earths remain candidates) and get in and out before the heat in the market moves elsewhere.

12.Bias new investments towards hot commodities: potash, copper, uranium, lithium and rare earths (again) are attracting more attention than most at present.

13.“Get set” in feasibility in readiness for production – when others consider a stock too boring to invest. Project developers have been outperforming producers of late.

14.Follow director trades – directors have a knack for knowing when their own companies are undervalued.

15.Back reputations: lightning often strikes twice (and then again) for successful mining entrepreneurs who have a proven track record.

16.Think dividends – stocks have a habit of recovering the “lost value” of a dividend payout pretty quickly, and you get the dividend too, of course.

17.Target in-specie distributions, the “free” shares in new commodity-focused spin-off companies.

18.Find unique commodity-linked company stories – when gold is hot the market’s interest is diluted across hundreds of companies, but there are far fewer companies in the likes of rhenium, vermiculite, talc, magnesium, indium, boron, graphite, fluorite and chromium should these commodities hit the market’s radar.

19.Invest when exploration drilling is imminent: interest rises as drill results draw near. Some of course would say “buy on rumour and sell on fact” when it comes to drill results. A new discovery does no harm to the share price either.

20.Act fast: they used to say “the big eat the small” in corporate circles, and in investment circles too. Now they say “the fast eat the slow”. Stay abreast of market information as it breaks and move quickly. Strong-form market efficiency still does not exist, even in the age of the internet.

That’s it for my best effort – made it to 20 ways having been given a target of 10 – but no doubt there are another 20 ways I have forgotten. Please let me know what they are, short of disclosing your proprietary trading system that is.

Good hunting.

Allan Trench is Adjunct Professor at the Western Australian School of Mines and a non-executive director of several resources sector companies. He is the Perth representative for CRU Strategies, the consulting division of independent metals and mining advisory CRU Group (allan.trench@crugroup.com).

Tags: Commodities