REVEALED: The Key to Success as a Mining Investor

Earlier this year, I wrote to my Diggers & Drillers members suggesting gold, copper, and silver could be the key metals to watch in 2024.

While it’s still very early days, these metals are setting up nicely for potential gains in the future.

One of our copper picks has jumped more than 50% since we recommended it last November. For reference, copper has risen around 9% over that time.

This is an example of how a stock delivers outsized gains relative to the underlying metal.

And a reason astute investors target specific stocks rather than broad commodity ETFs. Though it comes with added risks.

But the key here is to find quality companies. Believe me, that’s easier said than done.

You’ll always find yourself holding some duds. But the key is letting these laggards go while retaining your rare gems.

If you keep a strict criteria, eventually, you’ll have a list of strong stocks.

So, how do you find the rare gems in the commodity market?

Some investors look for quality management.

Others focus on attributes like a clean balance sheet, low operating costs or stocks with a strong track record of meeting production guidance.

But the thing is, all these factors tend to come together when the geology is favourable.

Call me biased, but I tend to gravitate to any stock holding a high-quality deposit.

The rest takes care of itself.

You see, having worked as a geologist and an investor has shown me that rocks in the ground matter most when picking quality companies in the resource sector.

And it doesn’t matter whether it’s a small-scale explorer or large-cap producer, success is ultimately driven by the underlying asset, the geology.

Consider a management team successfully delivering back-to-back production guidance on a high-grade open-cut mine.

Well, it’s far easier to build a track record of success on a project like this versus a deep underground deposit with complex engineering and inconsistent mineralisation.

In fact, you could argue true skill comes from delivering on marginal projects.

Yet, it doesn’t work that way in this industry.

The title of success falls into the hands of those delivering the fattest profits.

Focusing on management as a key stock-picking criterion can lead to biased investment choices.

On the other hand, geology never lies. It only surprises!

That’s why focussing on the rocks should be your number one factor when picking a stock in the resource sector.

Sticking with the rocks will put you far ahead in sidestepping the duds and picking gems.

But there’s more to a resource company than its geology.

As a resource investor, you do need to consider the bigger picture.

Understanding supply and demand nuances

Commodity markets are a complex beast and riddled with risk.

Even if you invest in the best copper or nickel discovery, this STILL won’t guarantee success.

Resource equities are heavily influenced by external factors driving demand and supply.

This could be a consequence of geopolitical outcomes squeezing supply in the market.

It could be from production downgrades (or upgrades) at major mines.

Or it could be a technological innovation that unlocks new supply.

The factors influencing supply and demand are diverse and can substantially impact the share price.

Take nickel for example.

This important industrial metal has fallen over 25% in the last 12 months. That’s a big move for a commodity.

Surging output from Indonesia’s nickel laterite mines has flooded the market with new supply.

According to some analysts, supply gluts could last years.

From Australia to northern Europe and all the way across the Pacific to Canada, nickel operators are shutting up shop.

Andrew Forrest’s Wyloo Metals closed the door on its nickel acquisition in Kambalda, Western Australia. A project formerly owned by Mincor Resources.

Meanwhile, BHP’s Nickel West operations have been put on notice.

The global response to oversupply has been predictable and unanimous. Operations are shifting into care and maintenance in the nickel market.

But Copper sits on the other end of the
supply spectrum

Global copper operations have endured decades of declining ore grades.

That’s been borne from a lack of investment in new mines and inadequate commitment to exploration.

This problem has lingered for well over a decade.

It’s something I’ve been warning readers about for months. The consequences are now starting to catch up with the market.

You see, smelting firms in China are in crisis mode. That’s because they can’t find adequate metal to sustain operations.

It’s a key reason copper hit a 12-month high last week while major North American producers broke into new all-time highs.

Falling treatment charges at Chinese smelting firms has fuelled this surge.

This nuanced feature of the copper market tends to point toward higher prices, so bear with me…

Treatment charges are what mining operators pay smelters to have their semi-processed ore, or concentrate, turned into finished metal.

So, why does that matter?

Well, smelting firms will reduce the smelting fees they charge copper miners as they compete for declining supply.

Therefore, contracts between miners and smelters are a handy LEADING indicator for investors.

It offers an early insight into where prices might be heading in the coming months.

I highlighted this to my D&D readers back in November 2023.

Back then, Chilean copper miner Antofagasta pencilled in one of the first major deals for 2024 with China’s Jinchuan Group.

Jinchuan is one of the country’s largest mineral processing companies. But a sharp drop in refining charges back then took the market by surprise.

A sharp lift in copper prices followed.

Yet, in recent weeks, more refiners have cut fees in response to tightening supply.

Ultimately, falling grades, mine closures and lack of investment in discovery all contributed to today’s supply shortage.

Time will tell, but the latest contracts clearly point to a long-term supply deficit for the copper market.

How that looks when demand begins to pick up is anyone’s guess!

But a perfect storm is brewing for this commodity.

If we see a meaningful lift in demand amid a major supply problem, the consequences could be huge!

The reaction last week demonstrates that the market is starting to price in these concerns.

But as I pointed out, the real surge will come alongside rising demand.

That’s why now is a great time to look at copper stocks for your portfolio.

If you’re interested in finding out the names of our prime copper picks in the D&D portfolio, you can do so here.

Until next time,

Regards,

James Cooper,
Editor, Mining: Phase One and Diggers and Drillers

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