Thor Mining PLC (AIM:THR): Risks You Need To Consider Before Buying
For Thor Mining PLC’s (AIM:THR) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. THR is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
View our latest analysis for Thor Mining
What is THR’s market risk?
Thor Mining’s beta of 0.63 indicates that the company is less volatile relative to the diversified market portfolio. This means that the change in THR's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. Based on this beta value, THR appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could THR's size and industry cause it to be more volatile?
THR, with its market capitalisation of AUD $3.50M, is a small-cap stock, which generally have higher beta than similar companies of larger size. Moreover, THR’s industry, metals and mining, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. Therefore, investors may expect high beta associated with small companies, as well as those operating in the metals and mining industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by THR’s size and industry relative to its actual beta value. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Is THR's cost structure indicative of a high beta?
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test THR’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Since THR’s fixed assets are only 0.04% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. As a result, the company may be less volatile relative to broad market movements, compared to a company of similar size but higher proportion of fixed assets. Similarly, THR’s beta value conveys the same message.
What this means for you:
Are you a shareholder? You may reap the benefit of muted movements during times of economic decline by holding onto THR. Its low fixed cost also means that, in terms of operating leverage, its costs are relatively malleable to preserve margins. I recommend analysing the stock in terms of your current portfolio composition before increasing your exposure to the stock.
Are you a potential investor? Before you buy THR, you should look at the stock in conjunction with their current portfolio holdings. THR may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, I recommend taking into account its fundamentals as well before jumping into the investment.
Beta is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Thor Mining for a more in-depth analysis of the stock to help you make a well-informed investment decision. But if you are not interested in Thor Mining anymore, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
