Resources — meaning companies in sectors like mining and other commodities — are generally not considered buy-and-hold stocks for a few key reasons:

1.Cyclicality and Earnings Volatility

Resource companies are deeply tied to commodity cycles, which are naturally volatile and influenced by global supply and demand dynamics. These cycles are often boom and bust:

When demand is high (e.g., economic expansion), prices rise, and resource companies become very profitable.

When demand softens or supply increases, prices fall, and profits evaporate — sometimes turning into losses.

This cyclical behaviour leads to wild swings in revenue, cash flow, and share prices, making these stocks unreliable for compounding long-term wealth.

2.Capital Intensity and Asset Depletion

Resource companies are capital intensive — they require massive ongoing investment in physical infrastructure just to maintain current production levels.

Also, their assets naturally deplete over time:

Mines are exhausted.

Drilling and exploration are required to find new resources, which is expensive and uncertain.

Even when commodity prices are high, much of the free cash flow from resource companies goes toward:

Replacing reserves

Complying with environmental regulations

Servicing debt

Paying dividends to keep shareholders happy

There’s little left over for the kind of compounding reinvestment that drives long-term stock market outperformance.

3.Dependence on Global Macroeconomic and Geopolitical Factors

Resource companies operate in a world shaped by:

Geopolitical risks

Government regulation and taxation

Currency fluctuations

Trade tensions

This means that even the best-managed resource companies can see their fortunes reversed overnight due to factors far outside their control.

4.Weak Long-Term Return on Capital

Long-term wealth creation is highly correlated with a company’s ability to generate high returns on capital and reinvest that capital at similar or higher returns. Resource companies typically:

Operate in low-margin, highly competitive markets

Have little pricing power — they’re price takers, not price setters

Must spend heavily just to maintain production

Often experience diminishing returns on new exploration

While some resource firms may occasionally generate impressive short-term profits during boom cycles, over decades, the average return on capital tends to be mediocre or poor — certainly lower than great compounding businesses in consumer, tech, or healthcare sectors.

5.Dividend Illusions and Unsustainable Payouts

Some resource stocks are favoured by income investors because they offer high dividend yields — sometimes 5–10% or more. But these yields are often unsustainable in downturns.

Because cash flows are so tied to commodity prices, dividends are often:

Cut or suspended during commodity downturns

Increased unsustainably during booms to appease shareholders

Used in lieu of growth, because reinvestment opportunities are limited

6.Limited Long-Term Competitive Advantages

Commodities companies generally lack a sustainable economic moat because their products are undifferentiated, and they compete primarily on price and cost of production — not on brand, technology, or customer loyalty.

Lauren Hua is a private client adviser at Fairmont Equities.

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