5 ways you can profit from the mining boom

There are a number of ways in which Australians can participate in the new wave of wealth from the mining boom – and it’s not just through property investment.

Let’s look at these a little more closely…

1.  Start-ups

One way to profit is to raise investment capital and become a founding shareholder of a resources exploration company. Unfortunately this takes a high level of skill and experience. Besides, much of the mining wealth will soon be heading to those mining companies who already are moving into the production phase rather than exploration phase (which can take many years).

2. Become an executive

If you can’t beat them, why not join them? You can become a mining executive if mining is your chosen career path. Obviously this path is only open to the few rather the many, and becoming a mining executive takes a lot of your time and commitment.

Tax rates in Australia are brutal on top-bracket salary income at 46.5%, so it would be preferable to ensure that a high proportion of your remuneration is sourced through shares, ZEPOs (zero-exercise price options) and other LTIs that secure you a big payday down the track.

3. Become a shareholder

This route is open to average Australians – you can buy shares in the mining companies. Traditionally, though, overall returns from mining companies for minority shareholders have been poor.

The reason for this is that mining companies tend to retain much of their net profits (after paying the executives) for exploring new projects and then constructing them. Consequently the Resources index over time has underperformed the Industrials index. If you want to make the best returns from mining companies you either need to be a founding shareholder or associated with the companies and industries which service rather than operate the mines.

4. Buying property in mining hotspots

Aussies can participate in the mining boom by buying residential investment property in mining towns. Can you make great returns from buying property in mining towns? Of course, if you (a) pick the right town and (b) don’t get the timing wrong.

Receltly Mount Isa was once again raised as a potential property hotspot. The reasons include the nearby uranium anomalies, many of which are as yet un-investigated.

Uranium can be used for nuclear power – arguably the greenest, if potentially riskiest, form of power – that is, if you don’t believe in renewable energies such as solar and wind farms (coincidentally, wind farms in the islands off Tasmania and around rural New South Wales are today’s big hotspot story).

Personally I don’t look to profit from uranium mines, partly because uranium is an unreliable mineral to generate mining profits from, but mainly because I just don’t like the extraction of radioactive minerals. Especially those which are used for armaments (previously much used for thermonuclear weapons) and eventually can end up causing illnesses like Gulf War Syndrome.

Ultimately, mining towns are about risk versus return. You can make healthy profits (if the word healthy should ever be associated with an article discussing uranium), but the risks include that mines create their own accommodation or councils release great swathes of land for new housing supply.

There is also industry and commodity price risk, and the specific risks associated with individual mines. Be wary of one-trick ponies as you are unlikely to elicit sympathy if you invest in a remote mining area and do your stash.

5.  Buying investment property in capital cities

Truth be told, much of the mining wealth will end up back in the capital cities where mining head offices, magnates and executives often reside. The usual criticisms when I suggest that capital cities represent a superior risk-adjusted investment include that this is this is an old-fashioned view.

I’d argue that is actually a time-tested view. There are reasons why inner and middle-ring suburbs of capital cities make a great long-term property investment:

I)             Demographics: falling household sizes requiring thousands more dwellings;

II)            Assured strong population growth for decades into the future in the major capital cities; and

III)           No land available for release in many desirable, prime-location, land-locked suburbs.

Steer away from the CBDs where large new tower blocks can be built causing over-supply. Instead, seek out great lifestyle suburbs where the population is growing strongly every year, but the number of new developments is restricted.

Buy counter-cyclically the types of properties that are close to the median price range, are relatively affordable and the types of properties that people increasingly choose to live in. Buy below market value and hold for as long as you can.

Old fashioned and boring? Yes. Also, safer…and profitable

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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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