How to invest in commodity stocks

Julie Brownlee, Fsp Invest, 21 May. 2014

Tags: commodity stocks, invest in commodity stocks, how to invest in commodity stocks, stocks, investing, commodities, commodity,

If you want to invest in commodity stocks, where should you start? What do you look for? And what should you check? Commodity stocks can be higher risk than other sectors, so it’s important you do thorough research. Let’s take a closer look…

You need to delve deep into the commodity company

If you choose to invest in commodity stocks, you need to look at the actual operations of the commodity company. You need to weigh up things like, does the company have working mines or is it only looking for commodities to mine?

This makes a difference. If a company is just prospecting possible deposits, it will be spending a lot of money at this stage. Whereas if the company is extracting ore, at least it should be making some money.

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The next thing to check out is if the company’s operations are profitable. Does it have low production costs? And does the company’s management have costs under control and takes measures to cut them?

Five things to check before investing in commodity stocks

Before you leap in, make sure you check the following too…

Number 1: What type of commodity does the company deal with?
Does the company specialise in a particular commodity or does it focus on a number of different commodities?

For example, a gold producer’s fortunes will follow the price of gold. But a diversified commodity company isn’t reliant on the price of one commodity.

Number 2: How does the company manage its overheads?
How high are the company’s production costs? Commodity-based companies usually provide production costs. It’s worthwhile comparing these among similar companies.

For example, if a gold producer’s production costs are $800 per ounce and the gold price is $1,000, the company’s making $200 an ounce on the gold produced.

Number 3: What life does the company’s mines have?
Have a look at the production of the company’s mines. You can usually check out the projected life of the mines. If the life of the mines are coming to an end, what does the company have in the pipeline to offset this?


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Number 4: What’s the company’s management like?
Do they have a lot of experience in the field? This can pay off as they can provide good direction for the company and its future.

Number 5: Where are the mines?
The more remote and dangerous the mines, the higher the risks for the company. This is something to consider when investing.

So there you have it, how to invest in commodity stocks.

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