20 Crucial Investment Guidelines For Investing in Resources Part 3
Before you plunge into investing in the Resources Sector, take a look at our Pre-Investment Checklist, specifically designed to arm investors with all they need to know before they put their hard earned cash on the line. In this four part series, we detail 20 Crucial Investment Guidelines to help you embark on your investment journey. You can check out the first two instalments in the series by clicking on the links below:
In this week’s instalment we cover backers, future plans, hedging, market sector and infrastructure.
Let’s start with...
Are there any high profile investors or backers?
This is usually a bit harder to find out, and can involve a bit of detective work or so-called ‘joining the dots’ and (surprise surprise) more reading.
Look through the key investors, top 20 shareholder lists, and companies that took large stock placements in your company of interest.
Run a Google search of holding companies and profile the associates of directors.
If you can identify any high profile investors who have had successes in the past, this is a huge plus.
Finfeed Handy Tip – Utilising the company presentations or annual reports, identify who are the major backers / shareholders / investors of your chosen company? Are you able to easily describe who they are and why their investment is significant to the company?
12. Future Plans
What is the long term future and price forecasts of the commodity the company is operating in?
With our preference in investing in developing companies, one has to think about the long term future of the commodity that the company is involved with.
Make sure you read commodity reports from several investment banks. Also keep up with industry reports for supply and demand dynamics and price forecasting.
For instance, if it is an iron ore company that you are investing in, you should be aware that a wave of supply is forecast to hit the market in 2014/2015. This will clearly have downward pressure on the iron ore price. Hence the reason why we would prefer to invest in iron ore companies with lower cash costs.
It is important to note that these price factors are generally factored into professional analyst reports and are widely expected by such people. However, due to the short term and immediate nature of the market, rises/falls in underlying commodity prices in the immediate or near term are important to consider.
Finfeed Handy Tip – Referring to Google and analyst reports released by stockbroking firms, can you find out the long-term future and price forecasts for the commodity your chosen company is working in?
The uncertainty arising from the volatility in commodity prices and exchange rates is of concern to management because of the possible negative impact on revenue, and hence profitability for a company and its projects.
If a company is hedged, it locks in a certain price for its production and gives certainty; however it reduces upside risk. That is, if the underlying commodity significantly appreciates, the company will miss out on this appreciation either in full or part, depending on the amount hedged.
It is our experience that the market generally reacts negatively to significant hedging, and that investors prefer the upside risk potential of unhedged companies.
Finfeed Handy Tip – Can you easily identify if there is any hedging for your chosen company? Refer to presentations and annual reports to garner this information.
14. Market Sector
Is the company operating in an up and coming (or underappreciated) market sector?
Picking the right market sector can be tricky. Bricks and mortar retail businesses are being challenged by growth in online shopping.
Yet some bricks and mortar sectors are thriving: take yoga and Pilates and the general fitness industry for a start.
As for online businesses you could look at the Internet of Things or telecommunications for inspiration.
The way to pick a rising market sector is to ‘read, read and read some more’ and identify global market trends.
If you find the business section in the newspaper boring, you had better start finding it interesting or you will lose your money: the papers offer a wealth of information about sector performance.
It is important to know what is going on in the world and the most effective places to invest.
Equally important, is to know when to get out of a dying industry or dying company.
Dick Smith anyone?
Finfeed Handy Tip – Find at least 3 general news articles or blogs about the market sector in which your chosen company is operating and gain a sense of where the market is heading – your company is wholly tied to this so you need to understand the wider market.
This is an important consideration.
Take mining for instance.
A stranded mining asset is much less likely to reach production than a deposit that is close to roads/ports etc., and will require much more capital to bring into development.
Consider investing in companies that have a clear infrastructure solution, or that is located in a geographically strategic location with access to existing infrastructure.
Finfeed Handy Tip – Check the company’s website, presentation and Google – identify where the closest export infrastructure to each asset is located and see if there is already existing infrastructure to get the product to port or if not, are there plans in place to do so.
In the final part in our 20 Crucial Investment Guidelines For Investing in Resources series, we cover:
- Political Risk
- Price Catalysts
- Takeover Potential
- Change and
- Chat Room Hype
Until next week...
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