What you need to know to pick the top mining stocks

Mining stocks are investments in companies that produce or explore for minerals such as uranium, coal, molybdenum (which is used in steelmaking), copper, silver and gold.

We think most investors should consider investing in mining stocks as part of a diversified portfolio. When we consider top mining stocks, we seek stocks with a history of earnings, or at least cash flow, that will provide long-term value for investors. Follow our tips below to find top mining stocks for your portfolio.

Convenient ways to invest in silver mining stocks

Silver is sometimes known as “poor man’s gold,” because it attracts a lot of interest as gold prices reach levels that seem too expensive for the average investor. But prices of silver mining stocks tend to rise along with gold prices. That’s because when gold prices soar, investors see silver as less of an industrial commodity and more as a precious metal. Silver mining stocks tend to also follow a price surge in silver.

If you want to invest in silver, we think the best way to do it is through silver mining stocks or ETFs. We recommend staying away from silver bullion, certificates representing an interest in bullion, and other silver bullion alternatives, such as so-called “junk silver” coins (these are common coins with no numismatic value and that trade strictly on their silver content).

Junior mining stocks can have strong potential as top mining stocks—but use caution

Despite the strong potential of top junior mining stocks, it’s important to remember that these stocks are among the riskiest you can buy. That’s why we think it’s a mistake to load your portfolio up with these highly volatile companies.

However, junior mining stocks can play a role in a portion of your portfolio, specifically the part you devote to aggressive resource investments.

5 things we look for when we analyze junior mines

1. We want to see experienced management with a proven ability to develop and finance a mine.
2. 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.
3. 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.
4. 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 who has agreed to pay for drilling, or other exploration or development, in exchange for an interest in the property.
5. We like mining stocks with strong balance sheets and low debt.

Should you invest in energy and mining stocks?

We recommend that investors diversify their portfolio across most if not all of the five major sectors, including Resources. However, note that some markets are inherently unpredictable, especially energy and mines.

The markets for fungible goods like oil, interest rates and gold are especially unpredictable.

Markets like these are so enormous that there is no practical limit to how much you can trade in them. It follows that if you could predict them, you could wind up acquiring a measurable proportion of all the money in the world, and nobody ever does that. That’s why it’s a mistake to build your portfolio in such a way that you have to accurately predict the future direction of fungible goods like oil, interest rates or gold.

If you diversify as we advise, you improve your chances of making money over long periods, no matter what happens in the market.

For example, manufacturing stocks may suffer if raw-material prices (including energy) rise, but in that case, your Resources stocks will gain. Rising wages can put pressure on manufacturers, but your Consumer stocks should do better as workers spend more.

Look for longevity in reserves for top mining stocks

When you invest in any resource stock, gold included, you need to look at how long the company’s reserves are likely to last. Those with low reserves need to have consistent success in their exploration programs to maximize the production of the mine and the surrounding area. That success is far from guaranteed.

Invest in gold stocks instead of bullion

Invest in gold through gold-mining stocks. Unlike bullion, these stocks at least have the potential to generate income. High-quality gold stocks can pay off nicely by establishing new mines and raising their production, even if gold goes sideways for a lengthy period. But keep in mind that no matter how appealing they look, you should limit gold stocks to a modest part of your portfolio.

Seek high average daily trading volume in top mining stocks

This is one positive factor to look for when picking junior mining stocks. The more actively traded junior mines are, the more liquid they are, which makes them easier to dispose of when it’s time to take profits.

Do you own any top mining stocks? How have they performed in your portfolio? Share your experience with us in the comments.