Small Cap Mining Overview

We’ve all seen the epic share price rises of large mining companies like Vedanta, Antofagasta, BHB Bhilliton and Xstrata, but it’s not just the big companies that are delivering large capital gains. Small caps miners are throwing a party of their own.

Last month, UK Coal was the top-performing share in the FTSE Small Cap Market with a rise of over 50 per cent. And the AIM All Share market saw two miners in the top five performing shares in November; Uranium Resources, and Oxus Gold which delivered an impressive 175 per cent return.

This is a growth sector, but what is the outlook for 2007?

Rocketing commodity prices have fuelled the recent rises in mining shares. Years of under-investment in mining development have caused limited supply in certain key minerals.  Coupled with rising demand the result is predictable; inventories run low and market prices go up.

But can the prices in commodities continue their march onwards?  Well this is a definite possibility. With the Chinese and Indian economies growing at extremely fast rates commodity prices are being pushed higher. With massive economic growth comes a need to upgrade infrastructure and this requires huge amounts of natural resources. 

The current bull market in commodities has lasted four years. This sounds like a long time, but the bull market that started in 1980 lasted 20 years. With demand rising, investment into mining development has been increasing, but it typically takes eight years to develop a mine. It may be that supply can't keep up with demand.

How to invest in Mining Small Caps

A fair few investors lose money in Mining Small Caps, largely because they forget that trading shares is all about balancing the odds in your favour. Many AIM mining companies fail. Many do well. The good news is that those that do well often go up by multiples, whereas those that fail will at worse only lose your initial investment.

The key is to invest small enough into each company so that the odds can play themselves out to give you an overall net gain.

Small cap mining companies are inherently volatile and risky, particularly early exploration companies.  This volatility enables the shares to spike upwards as well as allowing it to fall sharply. If the current bull market mirrors the behaviour of previous ones and carries on for years, this may well be an area worth getting involved in.

Investors Chronicle - 8th December 2006