Why Do We Invest in Mining Towns?

Over several years now we’ve seen the hype of investing in mining towns. We’ve also heard that it’s risky. Have you ever taken the time, however, to actually look into the mining resources sector growth in Australian yourself? To think through the pros and cons, to research the mining projects and how they progress and evolve, how they impact upon a town or a community? Most of us haven’t and most of us seem to sit in one of two camps. We’ve heard the media hype about the risks and we haven’t looked into it any further, writing it off as something that other investors do or we jumped on board with it and figured we’d ride this wave!

In the next articles to come, we will explore the risks of mining town investments and ways to reduce those risks. For this first part, we will delve into the types of mining towns and their scale of risks and rewards.  Of course, nothing is black and white and in this article we’ll look at a few of the basics around mining town investment, such as why people invest in mining towns, what sort of towns constitute a ‘mining town investment’ and we’ll talk about the risks that keep most people away and what, if anything, we can do to mitigate those risks.

So firstly, why is it that people invest in mining town locations? Well, like most investments, there are two answers. They are looking for growth and they are looking for cashflow. When a mining town ‘booms’ then you can have both of these and potentially, in spades.

Bringing it back to the basics, when a company invests in a large scale mining project, it creates jobs. Those jobs are filled by people, people who will most likely be coming into the region from elsewhere and need to be housed. The added demand for housing, in what are sometimes very small towns (or at least start out that way) means that rental demand and demand to purchase housing and construct housing is increased, yield increases and prices are driven up. Growth and cashflow.

Types of Mining Town Investments

There are different scales of towns that impacted by the mining projects and for simplicity’s sake I’ve broken them down into three groups.

Pure mining town – I class these as the smaller towns, which have limited facilites and resources, usually relatively small populations ( less than 5000) and where you could probably pick up a house, before the mining project, for next to nothing (well, in Australian property terms, anyway!). Often, these are also the towns that are located closest to the mines and therefore are often geographically isoloated. When a mining project comes to town their economic growth will most likely be intrinsically linked to the project and therefore their success or continued growth (or lack of) will be highly dependent upon the specific project(s) supporting the town.

These are towns where you will see a huge increase in property values and rental yields as a result of a mining project. These are your Dysarts, your Moranbahs and your Blackwaters. Note – places like Moranbah and Dysart have grown up a lot since the early days and so facilities, services and populations might now exceed those ‘parameters’ I talked about.

  

Regional town – I consider these locations as the larger regional towns where population is more likely to be over 5,000 and the town has more services and facilities – and all of that was before the mining projects came to town. In these towns you’ll find schools, shops, maybe a university campus and a country hospital. These areas are likely to have been built up on the back of other industries such as farming and agriculture. To me, it’s places like Emerald in QLD or Maitland in NSW. There is good growth to be found in these towns when the mining resources projects come to town and also good cashflow, though usually to a lesser extent than the growth and yields seen in the mining towns.

Large regional centre – These are the large scale regional cities that provide the big time infrastructure and services in our states, outside of the capital city. These regional centres would usually have a population over 80,000 or so. They would have schools, universities, large hospitals and shopping centres. These centres usually have a variety of industries and an economy of their own that was, and would be, there independently of mining. What you can find is that some of these towns, particularly those featuring a port can really experience growth in conjunction with the mining sector as they provide the major services and support to the mining activities of the region. We’re talking about places like Newcastle in NSW or Mackay in QLD.

Now of course, these distinctions are not scientific and I’m not going to enter into debate about where you want to put a time, the idea is to demonstrate that at the smaller end of the spectrum we have the small scale towns, totally dependent on the mining project(s) that present an opportunity for very high growth and cashflow, but also higher risk. At the other end of the spectrum we have the larger regional centres where you can experience good growth and cashflow, though at a much lower rate and also, a much lower risk.

 

Interested in investing in mining town locations?  Want some assistance from someone who is passionate about helping investors to invest successfully and in a manner than suits their investment strategy and risk profile?  Give me a call, I’d be happy to help.

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