Minerals: Investing Essentials

Minerals are vital to modern society. According to the National Mining Association, computer chips alone use more than 60 different minerals, while the Department of Defense used more than 750 thousand tons of minerals each year. Further, minerals are especially vital in renewable energy as wind turbines wouldn't be possible without rare earth elements and solar panels are heavily reliant on minerals like silica. Basically, without minerals modern society wouldn't be possible.

What are minerals?

A mineral is a substance that occurs in nature that is solid and stable. There are more than 4,900 known minerals in the world, however, only about 150 are currently considered to be important minerals. These either have enough abundance to be used commercially or have a pleasing aesthetic value for collecting or to be used in jewelry.

The most common mineral is quartz or silica, with sand typically being made of quartz. But there are several other commonly known minerals including aluminum, copper, gold, iron ore, potash, and diamonds. Minerals are essential to modern society as they are used to make metal products, building materials, fertilizers, and even money.

Amethyst, a variety of quartz. Photo credit: Didier Descouens via Wikipedia 

How big is the minerals industry?

According to the National Mining Association, the average person uses 38,524 pounds of minerals each and every year. A lot of those minerals are used in building materials for our homes, offices and roads and includes 15,093 pounds of sand, gravel, and stone along with 573 pounds of cement as well as copper, iron ore, and a host of other minerals. Suffice it to say the minerals industry is massive.

In the U.S. the minerals mining industry supports 1.2 million jobs. On top of that every metal mining job is estimated to support 2.5 additional jobs elsewhere in the economy while every nonmetal mining job is estimated to support 1.8 additional jobs. Further, the U.S. mining industry produced $76.5 billion worth of mineral raw materials in 2012, which were used by technology companies, manufacturers, and the construction industry. These companies transformed the minerals into the valuable products we use each and every day and added $2 trillion to the U.S. economy, or about 12% of GDP in 2012.

How does the minerals industry work?

In the U.S. alone there are nearly 2,000 mines and processing plants developing 74 different types of nonfuel minerals and materials. But not all of these mineral mines, and the companies operating them, are worth the attention of investors. The minerals that are most heavily watched by investors are as follows:

  • Agriculture minerals including phosphate and potash.
  • Metals like aluminum, copper, iron ore, and rare earths.
  • Industrial minerals like lithium.
  • Precious metals like gold, silver, and platinum. 

What are the drivers of the minerals industry?

While overall economic growth drives the minerals industry, each mineral has its own drivers. For example, agricultural minerals are driven by population growth and crop prices. Meanwhile, metals like aluminum, copper, and iron ore are driven by construction growth.

Demand for specific minerals can increase as a new use arises. For example, lithium is important in making batteries and is finding increased usage in consumer electronics as well as electric vehicles. Meanwhile, demand for quartz and silica has increased in recent years due to its being used as a proppant in fracking for oil and gas as well as in solar panels.

Lithium operations in Nevada. Photo credit: Flickr user Doc Searls 

Demand for precious metals like silver and gold can ebb and flow depending on the price. Global economic fears or inflationary worries can send the price of precious metals higher.

Because of this investors need to ask themselves several questions before investing in a company mining minerals. Topping the list is what's driving the demand of the mineral and how likely is that demand to increase in the future. Further, mining companies are notorious for overestimating future demand and building too much capacity. This can impact an investment as costs can overrun to the point where an investor was correct in a thesis that demand would be great, but wrong in the selection of the company that would best profit from that demand. For this reason investors need to be careful to choose the correct mineral and the best way to invest in its growth in order to profit from the mineral industry.

 


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