Don’t Buy Toilet Paper — Buy This Instead: Investing in Mining Stocks
Early yesterday morning, Scott Morrison announced that there was ‘some sort’ of coronavirus stimulus package on its way to us.
A few hours later, the Reserve Bank of Australia cut rates by 0.25%.
And the Federal Reserve Bank went and lowered rates by 0.50% while Aussies were sleeping.
The markets still didn’t like that, and US stocks tanked again overnight.
It’s safe to say Aussie stocks are going to take a tumble again today.
So, what’s an Aussie to do?
Rush out and buy toilet paper?
Judging by the shopping trolleys I’m seeing at my own supermarket, that’s how some people are responding. That and buying up bottled water, tuna, baked beans, and hand sanitiser.
Fear is a powerful thing.
But copying everyone else isn’t useful.
It’s times like this, you need more than ever, to think independently about what’s going on.
No conspiracy theories. No hype.
The coronavirus isn’t the end of the world as we know it.
Yes, it is very disruptive to markets.
But with disruption, comes opportunity…
We still need what’s in the ground
The Prospectors and Developers Association of Canada (PDAC) is underway in Toronto right now.
This nasty flu is keeping punters away.
Normally this bustling conference is full of institutional investors, geologists, mining bosses, and clued-up commodity investors.
However, when it kicked off this week hardly anyone was there. With Paul Robinson, a director of a commodity analysis firm, saying:
‘We can’t not talk about Covid-19 — coronavirus.
‘At the moment, there is no real change in global demand…Some travel is hit — you can see how empty this room is compared to normal, but we haven’t got any sort of level of significant hit like we’ve seen in China and South Korea.
‘A lot about the second half of 2020 depends on the stimulus — there will definitely be a stimulus in China, that is guaranteed.’1
Robinson then goes on to point out that the stimuli are likely to vary. But there is one sector that will benefit from it: commodities.
For example, if a government starts throwing money into the ‘green economy’ that’s good for things like copper, cobalt, and nickel.
But if they go the ‘old school’ way — infrastructure projects — then we’d see higher prices in iron ore, steel, and of course, copper.
Yet, how many people are thinking about a potential commodities boom on the back of the virus? Few, I’d say.
This is why it’s so important to look beyond the headlines, and look for how you can benefit from it.
Mining mergers to drive markets
While this virus will be disruptive to supply chains, there’s still ‘big picture’ stories happening behind the headlines.
A couple of weeks ago I explained what I think are the two biggest trends for 2020: more mining merger activity and more exploration.
Of course, this was all before the coronavirus started rattling markets.
And I have no doubt that mining stocks — and especially exploration stocks — are going to take a beating.
Nonetheless, investors need to be patient and wait out a falling market.
Because new investing opportunities will arise.
Money may dry up in the short term for the sector. It may be very hard for these companies to raise money.
But that smashing in one sector will present incredible investing opportunities if you understand the big picture in the background.
Big mining companies have seen their ore reserves fall because they haven’t been actively looking for more.
Nonetheless, mining is a depletion business. Once you have ore out of the ground, you are estentially losing your asset base.
Rather than take on the exploration risk that comes with hunting commodities, I suspect miners are going to continue to gobble each other up.
The high Aussie dollar prices for iron ore and gold, for example, has left producers of these minerals with cash burning a hole in their pockets.
Why risk looking for the stuff, when you can just go buy a company that has a proven resource?
The key to remaining a global mining juggernaut is to ensure you’re keeping a solid reserve base.
What does this mean?
Mining stocks are going to have a bumpy few months while the fear of the coronavirus plays out.
However, as the fear wears off — and perhaps as government stimulus kicks in — there’ll be plenty of opportunities to invest in mining stocks.
How do you play that? Well, that’s where I come in…
Until next time,
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