Investing in a gold mining company may seem like a no-lose proposition, but there are many factors to consider before jumping into a gold mine investment. Here is everything you need to know about investing in gold mining companies.
What Are Mining Stocks?
When you purchase gold mining stocks, you are buying shares in gold mining companies. Gold mining stocks buy you a part of the company digging for gold, not the physical gold itself. Gold mining stocks are separated into senior and junior stocks.
- Senior Stocks: Senior stocks (also called major stocks) are shares sold by well-established, large gold mining companies. Senior stock companies usually have a high market value, mining sites around the world, and a steady flow of capital. Investing in a senior gold mining stock is the safest way to invest in a gold mining company.
- Junior Stocks: Junior stocks are shares sold by small, relatively new gold mining companies. Junior gold mining companies are not actively producing gold, but still exploring ore deposits and developing mining sites. Junior companies usually have a low market value and minimal capital.
What Factors Affect the Price of Mining Stocks?
In addition to factors that affect every stock (such as commodity market prices), gold mine stock prices are affected by several unique and complicated variables. From gold prices to Ebola, here are the most influential factors affecting gold mine investments:
- Gold Market Prices: The market price of gold is especially important for large, well-established mining companies that have several gold-producing mines. Well-established gold mines generally have set production costs, so increases in the price of gold directly benefit the mining company and its investors.
- Operational Efficiency: A gold mining company’s profitability and stock price are greatly affected by its management of operational costs. Operational efficiency is a critical factor affecting the stock price of large, well-established gold mining companies. A company that can decrease costs while maintaining production will become more profitable and thereby increase the profits of their shareholders.
- Ability to Market to Investors: Marketing is critical for junior mining companies that are not yet producing gold. Bringing a gold mine from the idea stage to production can take up to 10 years and requires a large amount of capital. Stock share prices for junior mining companies are driven by how well they can market themselves to potential investors.
- Geopolitical Affairs and Security Risks: Many mining operations occur in areas with high political tension, are isolated or conflict-ridden . A slowdown or stoppage of production can result from legal issues, cyberterrorism, push-back from environmental groups and organized crime groups. The highly contagious Ebola virus  halted production at several mines after spreading through the associated mining camps. Anything that can slow or stop mine production can cause a drop in gold mine stock prices.
What Are the Pros and Cons of Holding Mining Stocks?
Like every other investment, investing in gold mining companies has its benefits and drawbacks. Before you consider investing in gold mines, be sure you know the pros and cons:
- When we are in a bull market, you can make more money owning stock in gold mining companies rather than physical gold. Gold mining stocks have historically outperformed gold prices. For gold mining companies, any increase in gold price goes directly to profit, as mining production costs generally remain steady over time.
- Gold mining companies can pay out dividends. Unlike shareholders in physical gold, investors in gold mining companies may receive dividends when the mining company becomes profitable. Dividends can be turned into more stock shares, leading to more income.
- Gold mining stocks can be sold and traded as easily as gold stocks.
- Mining companies are plagued by uncertainty, making their stock price highly volatile. Mining companies deal with fluctuations in the price of gold, inflation and economic stability, and a host of issues not faced by other companies. Mining companies must remain friendly with governing bodies that are politically shaky, corrupt or ineffective. Political and environmental activists may cause shutdowns by damaging equipment or staging protests. Mining accidents  occur. Organized crime outfits may funnel away profits.
- Investing in a junior gold mining company is very risky. Steps to bringing a mine online include the identification of profitable gold deposits and the building of infrastructure such as roads, bridges. Mining companies must create mutually profitable relationships with local authorities, government entities and labor unions. Once operational, mines must remain productive even when the market takes a downturn, as the cost to reopen a shuttered mine is higher than maintaining operations. Following a junior mining company from discovery to production can, at best, tie up your money for years or, at worst, result in a loss.
- Choosing the right gold mining investment is difficult due to the many unique factors affecting the mining industry.
- Gold mines don’t last forever. Geologists estimate underground gold reserves using geological principals and past production in the area. Even with the most up-to-date technology, it is hard to determine a definitive lifespan for any mining operation. Also, over time, all gold mines see a decline in their grade or quality of ore. Eventually, every mining operation becomes too expensive to operate due to decreasing gold stores or ore quality.
- Gold stockholders can wait out a downturn in the market, but a lengthy downturn in gold prices can leave mining companies in the lurch, often leading to bankruptcy.
- In a bear market, gold mine stockholders will lose more money than those that invest in physical gold. Owning gold mine company stock comes with company debt and operational costs, neither of which accompanies physical gold shares.
Jumping into an investment in a gold mining company can be very tempting during a bull market. If you are considering adding gold mining to your portfolio, proceed with caution, and seek advice from a professional. Making a profit from gold mining investments is possible but requires hard work, patience, skill and a healthy dose of luck.
1. Australian National University. ‘Conflicts in marginal locations: Small-scale gold-mining in the Amazon,’ by Marjo de Theije and Ton Salman. http://press-files.anu.edu.au/downloads/press/n3952/pdf/ch12.pdf. Accessed September 22, 2020.
2. Mining.com. ‘More than a third of gold mines in Congo exposed to Ebola – report,’ by Cecilia Jamasmie. https://www.mining.com/third-gold-mines-congo-exposed-ebola-report/. Accessed September 22, 2020.
3. Science Direct. ‘Trends and causes of fatalities in South African mines,’ by J.P. Leger. https://www.sciencedirect.com/science/article/pii/092575359190019I. Accessed September 22, 2020.