The number of resource stocks hitting 52-week lows lately is quite telling, and indicates just what the market thinks of the potential of commodity producers at the moment.
Of course, every week brings a handful of beaten up mineral explorers hitting a new low, but recent months have brought a flood of them. So readers shouldn't be surprised to see that two of the following companies have significant exposure to the resource –in this case, mining – industry:
Rio Tinto Limited (ASX: RIO) – last traded at $37.54, down 35% for the year
Rio's woes have been well documented in the media, and there's likely to be an increased spotlight on the company following BHP Billiton Limited's (ASX: BHP) credit rating downgrade yesterday. I was previously a shareholder of Rio, and I initially intended to hold my shares through the iron ore downturn, figuring that the company's low cost of production, market power, and balance sheet would see it through.
I subsequently had a change of heart and sold my shares in May last year after I realised I was confusing the likelihood of Rio surviving with the chance of it delivering decent returns over the next few years.
Rio will survive, but the outlook for the iron ore market is very unclear, and there's no immediately visible catalyst for a rebound in prices which would be necessary to see Rio's earnings and share price recover lost ground. Investors should think hard about how much exposure they have to Rio, which I believe could hit new lows in coming months.
Orica Ltd (ASX: ORI) – last traded at $13.18, down 27% for the year
Orica shares have lost ground recently after company underlying Net Profit After Tax (NPAT) came in a quarter lower than last year. Orica also cancelled its share buyback program, conducted big write-downs on its ammonium nitrate and ground support businesses, and was found to owe the tax man an additional $36 million relating to refinancing deals from a decade ago; no doubt these announcements have also weighed on the share price.
I like Orica as a business, but with weak conditions in key markets expected to remain for the foreseeable future, potential Orica buyers might be better off looking elsewhere in the meantime.
Select Harvests Limited (ASX: SHV) – last traded at $5.27, down 20% for the year
Select Harvests shares have come under pressure lately despite the company announcing it expected its second half 2015 profit to exceed that of the first half. Part of the reason for the share price fall appears to be due to 10-15% fall in almond spot prices announced by the company in mid-January. Both Credit Suisse and Goldman Sachs appear to be increasing their short-selling positions – betting on further price falls.
The forward outlook for Select Harvests depends substantially on the supply and demand of its key commodity, almonds. With California in severe drought, Select Harvests has had a good few years. However, prices of almonds are now well and truly high enough to entice competition into the market which will increase supply even though demand from consumers remains strong. Buyers might want to do further research into the almond market before considering a purchase of Select Harvests.
