Investing in mineral company stocks can be profitable if you choose the right ones. But investing too heavily in low-quality juniors can lead to big losses. Learn more now.

Good mineral company stocks have a range of development projects, but their strong base of production cuts the risk of relying on new developments alone.

We also look for well-financed mineral company 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 drilling or other exploration or development in exchange for an interest in the property.

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Three key factors to watch for to successfully invest in mineral company stocks

Look for steady production: Some of the most highly promoted mineral company stocks are penny stocks that have yet to produce an ounce of gold or other minerals. Many must still add to their reserves, invest in mine-feasibility studies, and raise a lot of money before they go into production. The prospects for most of these penny-mine properties, even though they may be in areas with existing mines nearby, are far from certain.

Invest in mineral company stocks with a broad base of operations: Even if the company has strong reserves, the best mining company stocks with the least risk also have a diversified reserve 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—but you’ll want to be sure they are not over-paying.

Focus on stable political regions: We generally stay away from mineral companies operating in insecure and politically unstable regions like the Congo and 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 need the foreign company’s capital and expertise to get any value out of the ground.

Look for these key characteristics before you invest in penny mineral company stocks

In general we avoid penny stocks that promote themselves too aggressively (or do so misleadingly). Here are eight more things we look for when we analyze penny mining stocks for Power Growth Investor, our newsletter for aggressive investing.

• When we recommend junior stocks exploring for minerals, we prefer those that operate in an area whose geology is similar to that of nearby producing mines.
• We want to see experienced management with a proven ability to develop and finance a mine.
• When investing in penny mining stocks, look at environmental constraints in places where junior miners are exploring for minerals. In Europe and certain parts of the U.S., junior miners need a particularly rich find to justify the costs of overcoming environmentalists’ objections.
• Ideally we want to see positive cash flow, preferably even when commodity prices are low.
• We prefer, if possible, to see mining companies that have cash flow from an existing mine that is sufficient to cover, or at least contribute to, the cost of developing a second mine.
• We avoid mining stocks that trade at unsustainably high prices because of broker hype or investor mania.
• We think you should avoid stocks that trade over the counter, where such things as regulatory reporting can be lax.
• We also like to see a reasonably sound balance sheet in the penny stocks we recommend. We like to see enough cash to keep operations going without the need for dilutive share issues at low prices. 

Avoid flow-through funds while investing in mineral company stocks 

Flow-through entity funds are tax shelters that mainly invest in the flow-through shares issued by junior mineral companies. These companies spend the proceeds from the shares they sell on mineral exploration and development, an activity that qualifies for certain tax credits and tax deferrals. These tax benefits “flow through” to investors in the fund. In general, to take advantage of these benefits, investors need to hold the funds for a fixed period, usually 18 months to two years.

Investors buying into flow-through limited partnerships are able to deduct 100% or more of their investment against income by the end of the second year. This leaves the investor with an adjusted cost base on the units of zero. When you subsequently redeem or sell the limited partnership units, you pay capital gains on the entire balance of the sale.

However, the problem with these tax shelters is that they may persuade you to make a risky investment you wouldn’t otherwise make. Moreover, a portion of the benefits are set aside for brokers and the fund’s organizers. What’s left may not be enough to pay you for taking on the extra risk.

Rather than invest in flow-through entities, we think you are much better off keeping things simple and investing in strong mining stocks. 

Use our three-part Successful Investor approach to find stocks for your portfolio, including top mineral company stocks 

1. Invest mainly in well-established, mostly 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 

At times, major investors will quickly pull out of mining projects. Do you feel confident investing in mining companies?

How much does the environmental impact of mineral mining influence your decision to invest?