Single Resource Companies
Not a good stock investment for me!
Single resource companies are generally found in the mining and oil industries that are involved in exploration and/or production of a single commodity.
Gold companies and oil companies commonly fall into this category.
What are the Risks?
Why do I avoid them? They are too dependent on the price of the lone resource.
Resource prices can fluctuate quite markedly over time for all sorts of reasons. Of course, this assumes that they have a resource to sell.
They may also be operating in one country and be exposed to sovereign risk when the government of that country decides that they want a bigger slice of the cake and arbitrarily change the rules.
If the government of that country is unstable, so might be the prospects of the company.
In some cases, the company may still be in the exploration phase and is 'burning cash' to finance the exploration. I would be gambling on the prospect of them finding something. This provides a greater reason for me to avoid them.
Even worse, if the company starts to run out of money, the company may call on shareholders to inject more money into the company. The shareholder then has to decide to come up with the money or get out.
Are There alternatives?
Companies that are involved in the exploration and production of a range of resources offer far less risk because of their diversification across resources and across countries.
Examples of these include global resource companies such as BHP Billiton and RIO.
Alternatively, some conglomerate companies may contain a resource division based on a single resource, as well as other divisions unrelated to resources. This provides them with some protection if the price of the resource drops for some reason.
Some single resource companies can enjoy being the flavor-of-the-month from time to time, they are high risk and not an ongoing passport to wealth.
Single resource uranium companies are a recent example as are rare earth companies that received considerable attention after China restricted exports of rare earth minerals.
So ... while short term traders may find these companies attractive because their share price can exhibit big percentage fluctuations, I look for good investment ideas elsewhere!
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