Investment Column: Six ideas for striking it rich in mining

Isn't mining just the most alluring industry in the investment landscape? It spins that simplest and most exciting of dreams, that of digging in the ground and striking it rich. And the London stock market provides ample opportunities to play this sector, from the raciest little exploratory venture in a far off land to the global goliaths that now make up more than 10 per cent of the FTSE 100.

It has been a vintage 12 months. As commodity prices have soared, largely on the back of strong demand from China, so share prices have jumped, in some cases, by as much as 50 per cent. We don't think this story is over, and there are more riches to come if you pick the right metal or mineral.

Thanks to the huge steel industries in China and India, iron ore is the commodity of the moment, with prices at about $120 a tonne, more than double benchmark prices in 2009. And for the moment at least, that means that Rio Tinto the jewel in the London crown.

Rio makes 70 per cent of net profits from the commodity, thanks to its world class iron ore assets that include its share of the Pilbara site in Western Australia. It also has projects with great potential, including the Simandou site in Guinea, and the similar assets in Mongolia.

Earlier this month, the company said that full year earnings would be 7 per cent ahead of forecasts and that half year net earnings were 125 per cent up on last year. Even though the digger's shares are up 40 per cent in the last year, the stock is still undervalued on a price to earnings basis to the rest of the mining giants. Rio Tinto is the pick of the bunch.

But investors ignore the rest of the sector at their peril. BHP Billiton, which spotted Rio's potential but failed in a bid to buy its rival two years ago, also has decent upside. Its shares have been treading water since April, when production numbers disappointed some analysts, and they are still inexpensive. We expect a boost from strong full year numbers next week, again thanks to its iron ore operations.

Anglo-American is another buy, after a transformational year. The group managed to rebuff the attentions of rival Xstrata last summer, and has since stripped away a lot of the flab that was limiting its shares.

These three picks all have large, diverse portfolios, which should limit the risks if any one commodity goes out of favour.

Randgold Resources

Other miners which concentrate their efforts on a single commodity can become a stock market proxy for that metal. Gold prices have soared from less than $950 an ounce a year ago to more than $1,200 today, thanks to nervousness about other assets, and that makes Randgold Resources a standout name in the sector. It isn't a cheap stock, trading on a whopping 22 times next year's predicted earnings, but the shares track the gold price which we think will continue to rise. It will grow into its rating.

We should note for newcomers to mining sector investing that these will never be stocks you can put in your portfolio and just forget about. Read the foreign news pages of the paper as closely as the shares pages. By necessity, miners are operating in some inhospitable places, and even in G20 economies they face more than their fair share of political risk. For example, the Australian government under former Prime Minister Kevin Rudd's proposed a 40 per cent profits tax on the industry. China has also flexed its considerable muscle against the miners, firing a shot across the bows of Rio earlier this year when it jailed four employees on bribery charges.

Ariana Resources

The most fun is, of course, down with the small caps, where brave investors can get rich or cry trying. If you are going to dabble, tick off a check-list of qualities: Is the company in production? Does it have the funds necessary to get its material to market? And is the price of whatever it is mining rising? The best bet for punters is to look for those that mine just one commodity, and at the moment there's nothing better than gold.

Turkey-focused Ariana Resources shows just how big the share price moves can be when news comes through. The stock jumped by 25 per cent in the last month alone after it signed joint venture agreements, signalling other companies' interest in some of its assets. Investors should look out for news of its so-called Red Rabbit project, which is getting closer to full production.

Similarly, shares in South American-based group, Mariana Resources, are up nearly 50 per cent on their level of six months ago. Drilling in Chile and Argentina, the group has uncovered impressive deposits of gold and silver, and had little difficultly in persuading institutional investors to part with about £7m in June to back more development of its mines.