Hard rock or hard luck: Mining as an investment

As we head into another exploration season, it's worth taking a minute to think about the investing side of the mining industry. A lot of Yukoners own mining stocks.

As we head into another exploration season, it’s worth taking a minute to think about the investing side of the mining industry.

A lot of Yukoners own mining stocks. When the Yukon skies are full of helicopters, and every guy in the bar is talking about the next big thing, it’s easy to get caught up in the enthusiasm. But chatter about mining investments is as cyclical as the industry itself. When markets are down, people tend not to tell stories about their investment losses.

This is the classic investing trap. There is good data that shows how regular investors tend to have more of their assets in regions and industries they are familiar with. This usually means industries close to home, even though there is no logical reason why people in Indiana should be over-invested in agribusiness or Yukoners in mining.

You might say that local knowledge can give an advantage. But, in reality, the average Indianan doesn’t really know more about agribusiness than the suits on Wall Street.

Overinvesting in an industry close to home violates the investing principle of diversification. Not only is too much of your money in one sector, but that sector is usually linked with other things in your life. As an example, say you worked for a mining contracting company in Whitehorse. If mining slumps, not only will your shares go down in value but the slowdown might cause your house price to go down or your job to disappear if your company loses contracts.

So how has the mining industry been as an investment? Some of the barroom chatter has been right. Some mining investments can pay off enormously. If you bought shares in 2002, when the industry was suffering from low commodity prices, you probably did very well. Some of the big international mining companies tripled or quadrupled in the following decade. Most major mining companies comfortably outperformed the broader market indices.

The situation has been much more challenging recently, especially in 2013. In the last five years, the iShares Global Mining Index Fund, which is a basket of big global mining companies, is down about 2 per cent. If you had invested in the S&P/TSX market index, which tracks the broader Canadian market, you would have been up 40 per cent instead.

Closer to home, what would have happened if you had invested $100 in some well-known Yukon mining companies five years ago? Selwyn, which at the time was working on the big Howard’s Pass lead-zinc project, more than doubled by early 2011. However, the company has sold its interest in Howard’s Pass and, as of last week, your $100 would have been worth about $25.

Your investment in Victoria Gold, which is trying to develop its “shovel ready” Eagle Gold project, would have been worth about $40.

Capstone, which owns the operating Minto mine, has been up over the period. Your $100 investment would be worth about $135 as of last week, less any fees you paid your friendly investment advisor of course.

If you bought in at the beginning of 2011, after shares had surged, however, you would have lost money on all three, including a whopping 90 per cent loss on Selwyn.

There are still opportunities in mining investing, of course. People lucky enough to time the market could have still made money on the ups and downs of the companies above. The best companies and the best properties can still pay off handsomely. The challenge, if you’re not a professional investor, is how to find them. And whether your source of investment opportunities is a big league broker or a guy who was talking to a guy in the Casa Loma, there are some rules of thumb you should keep in mind.

The first is that your mining investments should be part of a broader financial plan. Get some advice from a professional. You don’t want your retirement fund to be composed of random mining stocks you bought over the years.

Second, only invest money you can afford to kiss goodbye. Mining stocks, especially junior ones, can be very volatile. This isn’t necessarily bad, depending on your point of view, since they can also pay off in a big way. However, if the worst happens and your mining company goes bankrupt, it shouldn’t be money you need to pay the rent.

Third, be cautious – very cautious – about using leverage. Some people will tell you to borrow money to invest, since it amplifies your returns. It seems like a miracle. You borrow $5,000, invest it in a hot mining stock that doubles, pay back the loan and you’ve made $5,000 for nothing.

Of course, if your stock collapses instead, you haven’t just lost money but are $5,000 in debt.

It has been a tough couple of years for mining investors. With some stocks so low, there may even be buying opportunities. As much as we want our local mining companies to succeed, however, it will take a bold investor to buy now.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Channel 9’s Yukonomist show or Twitter @hallidaykeith