Boom, bust or both


The resources industry giveth, and the resources industry taketh away.

Okay, so I might have used a little poetic licence there, but investors could be forgiven for thinking that might just be the theme of this earnings season from resources companies.

My colleague Mike King highlighted the ‘something for everyone’ feeling of late in an article yesterday, contrasting the statements and decisions of some of our largest miners, with BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) squaring off at 20 paces over the future demand from China, and the likely prices that the mining industry will be receiving.

Rio continues to be bullish, pushing ahead with production expansion plans, as does Fortescue (ASX: FMG), which plans to triple its iron ore output in short order.

While we’re used to seeing companies taking different views from each other, Oz Minerals’ (ASX: OZL) presented both sides of the resources coin all by itself today, when it released its first-half profit.

Oz Minerals is expecting a financial year that will be one of two very different halves.

The current half results were impressive, with profit growing 5% to $114 million, but revenue has fallen, as has the company’s gold output.

The disappointing element of Oz Minerals’ announcement is its second half production guidance, which the company now says will be at the lower end of previous forecasts. Worryingly, the company’s cash cost — an important metric when companies have little control over selling prices — is forecast to rise.

The company is now in a race against time to identify potential exploration opportunities, as its current (and only) producing mine, Prominent Hill in South Australia, forecast to run out of copper in the next 6 years or so.

Investors were less than impressed, sending shares down 7% today.

Foolish takeaway

Resources investing can be very rewarding, but carries different risks to investing in industrial companies. Whereas many industrial companies have a degree of pricing power, repeat purchase and brand recognition, resources businesses face a single global price, fluctuating demand, the uncertainty of exploration and finite mine lives.

The flipside is that the return can also be greater.

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Scott Phillips is an investment analyst with The Motley Fool. He owns shares in Woolworths and Coca-Cola Amatil and has previously been employed by Goodman Fielder. You can follow Scott on Twitter @TMFGillaThe Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691).

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