The best mineral stocks to buy will have a broad base of steady operations and will be situated in politically stable jurisdictions among possessing other key factors

Top-quality stocks tend to lose less of their value in market setbacks, and they also tend to bounce back nicely when conditions improve. These are the kinds of stocks we continue to recommend in our newsletters and other services.

To build a portfolio of those stocks—and to show the best long-term results, Pat McKeough still thinks you should stick with his three-part program:

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

One added point: You’ll want to stay away from the most highly speculative types of aggressive investments. For instance, avoid loading up on speculative mining exploration stocks that have not yet proven they have a mineral deposit that can be mined at a profit.

Look for these key characteristics to find the best mineral stocks to buy

Invest in stocks with a broad base of operations: Even if the company has strong reserves, the best mining 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. Top mining companies can also increase their reserves by making acquisitions—with mineral prices down, you may see an increase in mining company acquisitions at distressed prices.

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Look into steady production: Some of the most highly promoted mining stocks, including gold stocks, are penny stocks that have yet to produce an ounce of gold or other minerals. Many must still find 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 production from existing mines nearby, are far from certain.

Think like an environmentalist: We look at environmental constraints where juniors are looking for minerals. In Europe and certain parts of the U.S, they need a particularly rich find to justify the costs of overcoming environmentalists’ objections.

Pick the right location: We want to see a lot of favourable factors, like strong mineral showings from extensive drill programs, before we recommend investing in mining stocks that operate in hostile environments, like the high Arctic.

Look at a stock’s market cap: We always look at the market cap of mining stocks versus the estimated value of the mineral resources they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size and grade of its ore body. For example, we like a gold stock’s market cap to be no more than half the value of the gold. We assume that the company will be able to expand its ore reserves after the mine opens, but if the mineral reserves are double the gold mining stock’s market cap, it provides a margin of safety.

Recognize that aggressive investors searching for mineral penny stocks need to keep these investment factors in mind for success

• We want to see experienced management with a proven ability to develop and finance a mine.
• When we recommend junior mines that only explore for minerals, we prefer those that operate in an area whose geology is similar to that of nearby producing mines.
• We think you should avoid stocks that trade over the counter, where such things as regulatory reporting are lax.

Investors in penny stocks also face one overriding, continual risk: it’s easier to launch a promising company than to create a successful business. That’s why only a minority of junior companies ever go on to significant success.

Avoid overvaluing penny stock mining companies when you are looking for the best mineral stocks to buy

Making a wrong move while investing in penny mines can cost you a big part, if not all, of your investment.

In the 18th century, pioneer economist Adam Smith (author of The Wealth of Nations) wrote that the public tends to overvalue what he called “speculative ventures.” The world has changed a lot since then, but his warning still applies—especially when it comes to penny mining stocks. These are low-priced stocks (often traded in pennies, but perhaps as high as $5 a share) that purport to have a mineral property holding a substantial mineral deposit that can in turn be transformed into a profit-making mine. Still, the odds of success are extremely low.

As mentioned, the investing public as a rule tends to overvalue penny mines. Investors pay too much attention to the vast profits that may come with success, and too little to the obstacles that stand in the way. The vast majority of penny mines fail to achieve their goals.

Have you invested in penny mines that led to a loss? What did you learn from that experience?