Introduction
Mining companies extract ore from the earth and extract minerals from that ore, this is the business of mining. Many of these companies are listed on the Australian Stock Exchange and offer Ordinary shares in their company. This happens on the Australian Securities Exchange and you can visit their site at www.asx.com.au. Shares are traded on the ASX through a registered share broker. There are numerous basic information pages at the site so there is no need to cover these basics here.
Important point
Something important to point out first – the business is mining and the buying and selling of shares in these companies is a derivative of the real or actual business. This explains why shares can go up and down, seemingly at random no matter what is happening down at the mine face. To be clear – a company may be expanding and doing very well yet their share price may be falling… the shares and share transaction activity is quite separate from the mining activity.
Share price
Once you master that thought, you can move onto why the share price moves up and down. Common theory is that share price is based on the current and / or future earnings of a company divided by the number of shares on issue. Apparently the market is supposed to calculate this with some measure of accuracy. This estimate is based on the aspirations and goals of a company and their potential to bring that into being. When it comes to resource stocks the market anticipates the exploration and or production success based on the location and type of the ore bodies the company is exploring or producing from.
The market is also trying to calculate the future price of the commodity the company mines, and how much profit potential there is in the project. There are a number of other factors that also affect price, obviously the first is news which fundamentally changes the prospects of a company such as a major mineral find or a mine disaster.
Influencing factors
We have just mentioned the first and that is news. By this I mean official news releases from the company. I had better add promotion to this factor. Stock Brokers are paid when shares are traded and they are also paid to sell new share issues for companies – new issues are new shares being listed in a company. In this case it is the company that pays the broker who must promote the new share issue. Then there are the newspapers, mining magazines and commercial analysts that recommend or publish stories about companies and all these activities can bring extra additional “news based” interest to a company and affect the share price.
News can cause a change in supply and demand which is the next factor to consider. This can also be as simple as a large share holder needing money, like another mining company that owns shares in another company and needs capital to advance their own project so they sell. Thinly traded stocks lack liquidity or turn over so price can change with smaller levels of selling or buying activity. This can work for or against a trader and should be understood.
Next factor is emotional – greed, uncertainty and fear. Share price momentum, up or down, can cause this and so can wider market factors such as general stock market crashes or long upward price rallies. Greed is positive energy, uncertainty is sort of neutral and fear is negative. Uncertainty can be caused as news is awaited or as price fluctuates in a price range – a neutral trend.
Predicting price movement
There are two major schools of thought on this, the first tries to consider and weight the importance of many factors within the investing environment such as; the direction and strength of markets, company expansion activity, economic and cost factors, anticipated commodity demand and supply and management changes to name just a few.
The second school of thought is technical analysis which is the art of reading charts and predicting future price behavior. This involves analysis of technical patterns and different technical indicators – searching for clues to investor sentiment, important underlying forces building that can assist the investor to anticipate continuation or reversal of price trends.
There are a number of different types of charts and these can be viewed in many time frames from intra-day 1 minute intervals to yearly intervals. Each interval being a separate vertical line on the chart.
We favor a mix of the two schools of thought, fundamental analysis to seek out and select the companies with the better prospects and then the use of technical analysis to select the safest or most opportune buy and sell points.