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Your instant 5-share mining portfolio

Australian PM Julia Gillard recently announced the mining boom is not over, so is now a good time to purchase quality resource stocks at a premium?

With a current market capital of $107,110 million, BHP Billiton (ASX: BHP) might have fallen from grace since 2011 but it’s still safe money. In 2011, BHP was, by revenue, the biggest miner in the world. Since February 2011, the share price has tumbled down from over $45.00 to open today at $33.35.

Last week, it was stated that a surplus of up to 250 million tonnes of iron ore will exist by 2017. With slowing demand in China, one of BHP and Rio Tinto’s (ASX: RIO) biggest global customers, the slowdown could result in the commodity becoming very volatile and affecting both revenues and profit, both of which the two mining giants have already felt.

For the half year ended 31 December 2012, BHP reported its NPAT was down 57.8% to US$4.24 billion citing lower commodity prices, a weak US dollar, and inflation that had more than offset the positive contribution from stronger volumes and operating cost savings. Investor nerves have realised the bleak short term outlook and the company is trading at a bargain. With a dividend yield of 3.4%, investors could do worse than have this giant in their portfolio.

Matching BHP’s losses tit for tat is Rio Tinto. Although not as big in terms of market capital, it has still managed to be hit just as hard by the weakening commodity prices and forecasts. Currently its shares are trading at a P/E of 10.62. Although reporting a net loss of US$3 billion after impairments of $US14.4 billion relating to its aluminium businesses and coal assets in Mozambique, the company is not sitting still. In its most recent half-year report the company stated a 42% increase in capital expenditure, proving to investors it’s willing to take action despite the tougher outlook.

The big two aren’t alone — the unwelcoming forecasts are industry-wide, and smaller resource stocks are also feeling the pinch. Fortescue Metals Group’s (ASX: FMG) share price has dropped 28.1% this past year, although perhaps it’s not so surprising when the company has a debt to equity ratio of 226%.

Atlas Iron Limited (ASX: AGO) has also suffered recently, down almost 60% since this time last year. Atlas hasn’t had much success with its stock price, but it has good balance sheets and growth prospects. Another S&P/ASX 200 Index (^AXJO) (ASX: XJO) favourite is Arrium Limited (ASX: ARI) which, at current market prices, provides a very good 6.2% dividend yield. Formally known as OneSteel Limited, Arrium’s 52-week high of $1.37 seems long gone. Combined with price target cuts by both JPMorgan Chase (NYSE: JPM) and Goldman Sachs (NYSE: GS), it’s no surprise the share price has suffered recently. Despite the cuts, the agencies have set price targets at $0.95 and $0.96 respectively, over 10% above the current market value.

Foolish takeaway

In the current climate, it seems hard to comprehend that the mining giants will make gains like the past. However, smaller miners like Mount Gibson Iron Limited (ASX: MGX) and BC Iron Limited (ASX: BCI) may be the preferred bet for many investors looking for growth opportunities in a cautious market. BC Iron’s strong balance sheet and dividend yield has been attractive to resource investors, consistently returning solid results over past five years and it seems it’s got plenty of room for growth.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz owns shares in Atlas Iron Limited.

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