Investing in resources stocks isn't for everyone. We're expected to risk our money in a business which must reinvest a large portion of its profits to stay afloat for usually just a few years.
In addition there's no guarantee a miner's extensive drilling program will even find what it's looking for and if it does who knows if it'll be worthwhile pulling it out of the ground. Chuck in necessary regulatory and environmental approvals, long project lead times and wild commodity prices and you can see why so many investors avoid the industry altogether.
However, if you're looking for some first-class mining and resources sector exposure, Rio Tinto Limited (ASX: RIO), Oil Search Limited (ASX: OSH) and Independence Group NL (ASX: IGO) are three stocks to consider adding to your watchlist.
Shares in Rio – Australia's biggest iron ore miner – have been hit hard in 2014, so far falling 8.8%. Whilst the miner maintains the lowest cost base of any domestic player, estimated to be $US43 per tonne, investors have sold down the stock as the spot price plummeted. Rio boasts operations outside of iron ore including Aluminium, Copper and Coal, which is likely a reason why its share price hasn't been hit as hard as its pure play iron ore rivals.
If the spot price of iron ore holds up and CEO Sam Walsh can pay down debt and return excess funds to shareholders, there could be value in Rio shares at today's prices.
Oil Search is PNG's premier oil and gas company, having been in existence since 1929. In coming years, Oil Search's cash flows, earnings and dividends are expected to climb significantly. Analysts are forecasting earnings per share to reach 60 cents and a dividend per share of 25 cents in FY15. This as the full force of increased production from operations such as the PNG LNG project comes online. However at current prices, it appears Oil Search shares are fairly priced.
Lastly gold, nickel, zinc and copper miner Independence Group has been going from strength to strength in recent years. Thanks to its diversified operations, Independence Group has been able to continue to invest in various beaten-down commodities (like gold) and will capitalise on their eventual upswing.
With the Tropicana gold project now online and the Long operation expected to benefit from stronger nickel prices, analysts are expecting very strong earnings and dividends per share growth in coming years.
Our top 3 resources stocks picks – Yours FREE!
