The primary factors that influence share prices of companies in the metals and mining sector are commodity market prices, operational efficiency and marketing to investors.
There are two tiers of companies in the metals and mining sector. The top tier consists of companies such as Barrick Gold (ABX) and Silver Wheaton (SLW) that already have a significant number of established, productive mines. For these companies, the factors driving share prices are the current market price for the ore they produce and their operational efficiency in terms of lowering production costs. The lower tier, known as junior miners, are those companies still in the exploration and development phase that have yet to bring productive mining operations online. For the junior companies, share price is driven primarily by their ability to successfully market themselves to investors.
Current commodity market price for the metals companies mine significantly affects share prices for productive, established mining companies. Once a mine is operational and producing, production costs are relatively fixed and do not tend to vary with the market price of the mined metal. Since increases in the market price of mined ore do not usually increase production costs, the benefit of increased market prices commonly goes directly to a mining company's bottom line net profits. When the market price of metals rises, share prices of mining companies often rise exponentially in comparison. A 20% increase in the price of gold can translate to a 50% increase in share price for a gold mining company.
Operational cost efficiency is key to a mining company's profitability and ultimately to its stock price. Mining companies have to make large capital expenditures to find, develop and bring a mine online productively, a process that normally takes five to 10 years. This requires careful planning and management of expenditures. There are numerous factors involved, and costs can vary widely for any of them. The costs involved in mining include hiring the right geologists to identify and assess ore deposits, building the necessary infrastructure to provide access to the mine site, negotiating with governments and negotiating labor costs. Once a mine is online and producing, careful cost management is still required; the company may have to weather cyclical changes in commodity prices over which it has no control. Mining companies must maintain operational mines even during downturns in commodity prices, since it is often cost prohibitive to go through the process of shutting down and then reopening a mine.
Significant improvements in cost-efficient production can greatly increase a mining company's profitability. First Majestic Silver (AG) has benefited from being able to reduce production costs by approximately $50 million without significantly reducing production levels.
Marketing their stocks and attracting new investors is of prime importance for junior mining companies. The ability to craft a good storyline regarding their future prospects and to communicate that story to investors is critical to the survival of mining companies still in the exploration and development phase, because they depend almost wholly on investors to fund their operations. Another key component is a company's ability to obtain favorable long-term financing.