How to Avoid Common Mistakes with Mining Actions (Part 4: Project Quality) Visual Capitalist

Investors view gold and silver as safe haven investments. But companies that produce gold and silver often offer volatile returns, creating opportunities for astute investors.

Volatility is a double-edged sword, particularly when it comes to investing in commodities. During the good times, it can create skyrocketing returns. But during tough times, it can get ugly.

Today’s infographic comes to us from the Prospector Portal and shows how investing in precious metals stocks can outperform or underperform the broader metals market.

Capitalize on volatility: timing matters

Just like most investments, timing is important for commodities.

Due to complex commodity production processes, unexpected demand shocks are addressed with slower supply responses. This, along with other factors, creates commodity super cycles: long periods of price rises and falls.

Investors need to plan their investments to take advantage of this volatility and there are several ways to do this.

Three ways to invest in commodities

There are three main avenues that investors can take when it comes to investing in commodities.

Investment method	Benefits	Limitations
Direct physical investment	The purest form of exposure Intrinsic value of a commodity and physical possession	High transaction costs (purchase, shipping, transport) Physical storage costs limit quantity and returns
Commodity futures	Investment in raw materials without the need for storage Benefits of diversification and inflation hedging	Complex and frequent transactions Contango risk: when futures contracts are more expensive than the underlying commodity
Stocks related to raw materials	Price exposure with no storage or transaction restrictions Opportunity to benefit from commodity prices and company performance	The returns depend on the valuation of the company Companies can mitigate risk by producing more commodities, reducing price leverage

Among these, commodity-related stocks offer by far the greatest leverage to price changes. Let’s dive into how investors can use this leverage to their advantage with volatile metal prices.

The fundamentals of investing in mining stocks

When it comes to investing in commodities, targeting miners and mining exploration companies has fundamental advantages and disadvantages.

As metal prices rise, the performance of mining companies improves in several ways, while under deteriorating conditions they do the opposite:

Category	Commodity prices rising	Commodity prices are falling
perspective	– Improved outlook	– Impaired prospects
Share price movement	– Equity growth	– Decline in equity
Payment of dividends	– Increase in dividends	– Decrease in dividends
Financial return	– Increase in earnings	– Decrease in profits

With the right timing, these ups and downs can create explosive opportunities.

Mining companies, especially explorers, use these price swings to their advantage and often produce returns to beat in the market during a recovery.

But how?

The proof: how mining stocks react to metal prices

Not only do price increases translate into higher profits for mining companies, they can also change the prospects and value of exploration companies. Consequently, investing in exploration companies can be a great way to gain exposure to changing prices.

That said, these types of companies can generate higher equity returns in a shorter period of time when prices are high, but they can also turn dramatically negative when prices are low.

Below, we compare the performance of producers and exploration companies with an NI-43-101 compliant asset during bullish and bearish precious metals markets.

All figures are in US dollars unless otherwise stated.

Mining company	Business phase	Primary metal Product	Market capitalization. 31 October 2019	Market capitalization. July 29, 2020	Bull market performance (1 November 2019 – 29 July 2020)	Bear Market Performance (2 January – 31 December 2018)
Banyan Gold	Exploration/ Development	Gold	$ 6 million	$ 40 million	500%	-44%
Renforth resources	Exploration	Gold	$ 8 million	$ 10 million	11%	-10%
Auryn Resources	Exploration	Gold, copper	$ 181 million	$ 330 million	60%	-39%
Wesdome Gold Mines Ltd.	Production	Gold	1,104 million dollars	$ 1.885 million	68%	110%
Monarch Gold	Exploration/ Development	Gold	$ 57 million	$ 148 million	139%	-23%
Exploration of the red pine	Exploration	Gold	$ 13 million	$ 22 million	29%	-55%
Revival Gold Inc.	Exploration/ Development	Gold	$ 27 million	$ 74 million	113%	5%
Erdene Resource Development	Exploration/ Development	Gold	$ 36 million	$ 111 million	222%	-56%
Endeavor Mining Corp.	Production	Gold	$ 2.622 million	$ 5.874 million	54%	-13%
Yamana Gold Inc	Production	Gold	$ 4.572 million	$ 8,279 million	87%	-22%

During the bear market period, the price of gold fell by 2.66% and, despite the exploration activity, most companies experienced a drop in stock prices.

In particular, exploration companies, or juniors, took a heavier blow, with average returns -31.66%. But even during a bear market, a discovery can make a difference, as in the case of manufacturer Wesdome Gold Mines, generating a 109.95% return in 2018.

• Average returns for gold producers, including Wesdome: 24.83%
• Average returns for gold producers excluding Wesdome: -17.65%

During the bull market period for gold, gold mining companies outperformed the price of gold, with young people offering the highest equity returns on average 153.43%. Gold producers outperformed the commodity market, the value of their shares increased 69.61%– Less than half that of exploration companies.

Silver: bears vs bulls

Similarly to gold mining companies, the performance of silver producers and explorers reflected the volatility of silver prices:

Company	Business phase	Primary metal Product	Market capitalization. 31 October 2019	Market capitalization. July 29, 2020	Bull Market Performance (1 November 2019 – 29 July 2020)	Bear Market Performance (January 2 – December 31, 2018)
Silvercrest Metals	Exploration	Silver	$ 694 million	$ 1,449 million	78%	117%
Pan American Silver	Production	Silver	$ 2,973 million	10,550 million dollars	125%	1%
Gold minerals	Exploration	Silver	$ 30 million	$ 80 million	80%	-42%
Gold and silver of the Americas	Production	Silver	$ 335 million	$ 482 million	10%	-56%
Dolly Varden Silver Corp.	Exploration	Silver	$ 28 million	$ 74 million	152%	-32%
Endeavor Silver	Production	Gold silver	$ 458 million	$ 837 million	72%	-10%

During the bear market period for silver, its price decreased by 9.8%. Both explorers and producers have seen their share prices fall, with silver producers’ equity capital decreasing 21.63%.

However, the discovery of a high-quality silver deposit once again made a difference for SilverCrest Metals, which generated a 116.85% return later in the year.

• Average returns for silver exploration companies, including SilverCrest: 8.32%
• Average returns for silver exploration companies excluding SilverCrest: -27.86%

On the other hand, during the bull market period, the price of silver increased by 34.33%. Silver exploration companies outperformed the price of silver.

• Average returns for silver producers: 69.04%
• Average Returns for Silver Exploration Companies: 95.36%

The potential to generate massive returns and losses is evident either way for gold and silver.

The investment potential of exploration

Mining stocks tend to outperform underlying commodity prices during bull markets, while underperforming during bear markets.

For mining exploration companies, these effects are even more pronounced: exploration companies are high risk but can offer high rewards when it comes to investing in commodities.

To reap the rewards of volatile returns, you need to know the risks and capture the market at the right time.