The top mining stocks to invest will share these characteristics including not operating in insecure and politically unstable regions

When you invest in any resource stock, gold included, one important factor you need to look at is how long the company’s reserves are likely to last. Those with low reserves need to have consistent success in their exploration programs to maintain production from their mines. That success is far from guaranteed.

The best mining stocks to invest in typically have a range of development projects, but their strong base of production cuts the risk of relying on new developments alone.

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Find mining stocks to invest in with a broad base of operations to lower the risk you subject your portfolio to

Even if the company has strong reserves, the best mining stocks with the least risk also have a diversified production base. That way they are not dependent on a single mine’s production or political stability in any one country. Mining companies can also increase their reserves by making acquisitions—with mineral prices down from their highs, you may see an increase in mining company acquisitions at distressed prices.

Furthermore, when we recommend mining stocks, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.

Focus on quality to find the best mining stocks to invest in

The resource sector is subject to wide and unpredictable swings in the prices it gets for its products. In the rising phase of the business cycle, when business is booming, resource demand expands faster than resource supply, so resource prices shoot up. This balloons profits at resource companies. When the economy slumps, resource prices fall, and this drags down resource profits and stock prices.

In many ways, quality mining stocks can be easier to spot during a downturn. Mining companies grew during the boom by acquiring projects—sometimes at any cost. Now, many of those companies are struggling with high debt levels and little cash. Many of them have written down the value of projects that are no longer economic at current prices.

They have also downgraded reserves that were estimated using optimistically high prices.

In contrast, companies that still have cash at lower points in the commodities cycle have the flexibility to buy producing or advanced projects at a bargain from other companies that need cash now. Distressed companies that don’t have cash flow, meanwhile, will likely be forced to sell assets for less than they are worth.

Mineral producers have to adjust to declines in resource prices by lowering their costs in order to maintain cash flow. The share prices of companies that have been successful in cutting costs will react very positively to upticks in commodity prices—provided they have low debt levels.

Top mining stocks to invest in will share these characteristics

Focus on stable political regions: As we said earlier, we generally stay away from mining companies operating in insecure and politically unstable regions such as Venezuela, or in countries with little respect for property rights and the rule of law, like Russia or Mongolia. Mining is inherently a politically vulnerable business; you can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they rely on the foreign company’s capital and expertise to get any value out of the ground.

Look for strong balance sheets: The best mining stocks all have sound balance sheets with manageable debt.

Invest in well-financed miners: We look for well-financed mining stocks with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests. The best junior miners have a major partner who has agreed to pay for the drilling or other exploration or development, in exchange for an interest in the property.

Aim for a dividend yield: Copper stocks, for instance, generally have higher dividend yields than gold stocks because they have steadier demand and more stable prices. As well, they’re usually much cheaper than gold stocks in relation to their earnings and cash flow. That means they potentially have less room to fall if markets in general fall. That’s also another way of saying that they can be less risky than gold.

Use our three-part Successful Investor strategy to find the best stocks for your portfolio—including mining stocks:

1. Invest mainly in well-established, dividend-paying companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

With greater concern for the environment, do you find it riskier to invest in mining stocks today?

Do you think the potential income from mining stocks is worth the volatility?