The mining and exploration sector has seen a surge in speculative investments, particularly in smaller companies listed on the AIM market. Many of these firms lack actual production or tangible assets, relying instead on speculative stories. Investors are cautioned to diversify their trades, set stop losses, and avoid overexposure due to risks like liquidity issues and volatility. While a few companies may succeed, most are unlikely to yield profits, leaving many investors at risk of losses. Careful, disciplined trading is advised.
In case you have not spotted it already the UK smaller companies market has experienced a mania some years ago in the mining and exploration sector. The names have changed since the DOT COM boom but the behaviour of investors and traders have not.
Many new mining companies have been using the London AIM market as a way to raise money with investors happy to pile into anything that has mining, gold, oil, resources or exploration in the name.
Now many will say that mining is far safer than some internet story and I agree if you are talking about major players, but most of the shares that are being bid up are not actually producing anything.
In many cases they own no Gold, Copper, Zinc, Oil or whatever. In most cases they have a small rented office and maybe a licence to mine. The actual results if any will be years down the line.
There’s a big difference between owning a physical commodity and owning mining or oil exploration share, with most shares you are buying a story.
Let me expand my point regarding mining stocks (and oil exploration) more generally with reasons why these are all ‘casino’ bets with a heavy bias to the ‘house’.
- There is usually no way of knowing accurately what is in the hole in the ground.
- The cost of extraction and complexity of doing so is also unknown.
- Management will always give the bullish case on the value of what might be there.
- Governments in some of these countries sometimes move the goalposts and claim rights to the find.
- Small shareholders will always be the last to know the bad news about an empty site.
The above (and doubtless many more reasons) are why most of these stocks trade on huge discounts to their supposed value and it is also why the vast majority of them end up failing.
For every mining share that will become a winner you can bet that we have at least 12 that are going to crash and burn, and that’s my concern. Most traders have not realised this. Charts that go up in a straight line often come down to earth.
The key is to be sensible and not over invest in any one share, however sure you are. And make sure you have a stop loss or an exit. Don’t get married to your trades, if bad news comes out then be ready to cut and run. In many cases bad company news comes in 3 or 4s so don’t hang around for a second chance to get out.
Managing Liquidity and Spreads in Small-Cap Mining Stocks
Another point you have to be aware of is spreads and liquidity. Many smaller companies may be hard to buy and sell, or you may find you are able to buy but then when you come to sell you find liquidity is very thin, especially if the market has become negative on the company. This is another reason to spread your trades over various companies.
Short Selling
Many of the mining shares can be traded via major brokers and other CFD firms so you have the option to bet shares to go down. You should never go short a share just because its looks high, who says it does not go higher? What you are looking for is the price to start moving down after a very big move up before you start placing down bets.
