Discover how to invest in mining stocks successfully, plus how to spot the stocks to stay out of

Although investing in mining stocks can add volatility to your portfolio, they often make good long-term investments.

We still believe most investors should consider investing in top mining stocks as part of a diversified portfolio. Learn how to invest in the best of the mining stocks with our tips below.

Discover how to invest in mining stocks profitably: Majors and minors

Junior mining stocks are usually smaller companies and take on risky mining exploration. If a junior mining stock is successful at finding a mineable mineral deposit, it can mean huge returns for investors.

But while junior mining stocks may offer some speculative appeal, we continue to recommend that you cut your risk in the volatile Resource sector by investing mostly in mining stocks of well-established mining companies with high-quality reserves. However, at the same time, Resource stocks (and this includes oil and gas, of course) should make up only a limited portion of your overall portfolio.

How Mining Stocks make a difference Learn everything you need to know in 'The Complete Guide to Mining Stocks' for FREE from The Successful Investor. Best Canadian Mining Stocks TSX: Plus Gold Stocks, Canadian Diamond Mines and more.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Here are five attributes we look for when we analyze junior miners:

• We want to see experienced management with a proven ability to develop and finance a mine.
• We look at environmental constraints where the junior mines are looking for minerals. In Europe and certain parts of the U.S., junior mines need a particularly rich find to justify the costs of overcoming environmentalists’ objections.
• When we recommend junior mines that only explore for minerals, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.
• We look for well-financed junior mines with no immediate need to sell shares at low prices. The best junior mining firms have a major partner that has agreed to pay for drilling, or other exploration or development, in exchange for an interest in the property.
• We like mining stocks with sound balance sheets and reasonable debt.

Majors are typically mining companies that have been in the mining business for many years, and more often than not they operate producing mines on a global scale. Successful majors have proven methods for exploration and mining, and have consistent output, and cash flow, year over year.

The best mining stocks help you satisfy these four points:

• They have well-financed mines with sound balance sheets. We look for well-financed mining stocks with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
• Avoid buying mining stocks that trade at unsustainably high prices. This is usually due to broker hype or investor mania about the underlying commodity (such as gold). Instead, we focus on reasonably priced mining stocks with favourable geology.
• Look at future demand. For example, rare earth stocks should grow over the coming years. The world’s demand for high-end rechargeable batteries is increasing, and the rare earth refinement process will also become less toxic. This opens up opportunities to mine in more environmentally strict jurisdictions.
• Look at the market cap of mining stocks. We look at the market cap of mining stocks versus the estimated value of the mineral resource they have in the ground. We like a mining stock’s market cap to be no more than half the value of the mine. We assume that the company will be able to expand its reserves after the mine opens, but if the reserves are double the mining stock’s market cap, it provides a margin of safety.

Bonus tip #1: Here’s the best way to invest in gold

Under the Successful Investor approach, we think the best way to invest in gold is through gold stocks. We recommend staying away from buying gold bullion, coins (unless you collect them as a hobby), or certificates representing an interest in bullion.

Like bullion, gold stocks benefit from increases in the price of gold. But unlike bullion, which comes with a continuing cash drain for management, insurance and so on, gold stocks have the potential to generate income.

We feel gold could well move higher over the longer term, although we expect it to remain volatile. Rising gold would mainly be driven by investor fears that still-low interest rates and government stimulus spending will spur inflation.

Conservative investors should be careful when making gold investments, as they would be with any volatile commodity investment. For these investors, gold should only make up a smaller part of the Resource segment of their portfolios.

Regardless of what happens in the gold market, speculative and promotional gold stocks will make significant gains from time to time on hopes of a gold discovery. However, that’s always true of any sort of speculative or promotional stocks. Keep in mind that most investors who dabble in them still wind up losing money.

Bonus tip #2: Use our three-part Successful Investor philosophy to make stronger portfolio investment decisions

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
3. Downplay or avoid stocks in the broker/media limelight

Stock fraud in mining is not uncommon. How do you safeguard yourself from fraudulent investments?

What criteria do you use to evaluate a company when you’re thinking about investing in mining stocks?