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Investors now looking for potential in mining stocks

According to The Australian, fund managers, bankers and lawyers are looking over the mining industry, trying to find stocks that the market has unfairly undervalued. Many investors have been trying to do the same thing, but it might be too early to start buying up.

Over the past six months pure-play commodity stocks have been hammered to say the least. Gold, coal and iron ore companies have been hit the hardest, with the likes of Evolution Mining (ASX: EVN), Atlas Iron (ASX: AGO) and Coalspur Mines (ASX: CPL) all dropping more than 50% in value in the past 12 months.

However, it would be nearly impossible to accurately value these companies because ‘experts’ can’t even come to a consensus on prices of the commodities they sell. All three of the above companies have seriously low earnings ratios but as a savvy investor you have to ask yourself is this is as low as they’ll go and is it worth the risk.

Even our biggest iron ore exporter, Rio Tinto (ASX: RIO), is not impressing the market and since February has dropped over 25% in value. The amalgamation of low commodity prices, even lower forecasted prices, increased supply and rising costs left Rio with a $3 billion deficit and a nasty sting in shareholders’ pockets.

Despite the difficulty investors face with valuing mining stocks, foreign state-owned companies have the ability to take on entire projects and extra costs and it seems now is the best time to do so. Rio has already put numerous projects and business divisions up for sale in the past year, including assets in Canada, USA and WA, which makes an investor think that it might not be out of the woods just yet.

Foolish takeaway

Although Rio’s next full year report may be a bit more enticing, there are other stocks on the ASX that pay higher dividends, have a sustainable future and could be considered safer. As for smaller miners, if investors could accurately and completely value individual commodities and stock prices, then it’s a great time to invest and exploit under valuations. For those of us who are willing to be patient, I would suggest we carefully analyse the next full year reports before making any decisions just yet.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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