Mining is down and mining services are limping along, still way down from earlier highs. It’s a sombre environment for investors. However, for Foolish investors that can be exactly what we should be looking for.
Cyclical industries like mining can be a minefield for investors trying to pick winners. Everything looks cheery and indestructible when the cycle is high and everyone seems to be making money. Come the cycle trough and we’re seeing companies fighting for survival.
Commodities markets always go through these phases, so if you are wanting to pick up good deals, then timing becomes more important. Even before they hit the peaks or valleys, traders begin anticipating the change and move beforehand, so you can still get caught out, if you are too early or too late.
With the big name mining related companies, you do have advantages of scale and the experience of going through previous market troughs. They know how to adjust and can set long-range plans. Here are two such big name stocks. Could they fit well in your portfolio and give you the long-term returns you want?
Orica Limited (ASX: ORI)
As a major producer of commercial explosives and industrial chemicals, it is affected by the mining pullback. However, it has business in over 50 countries, so only about 35% of revenue is in Australia. Other mining regions like in resource-rich Africa and Asia can diversify the risk. The stock is up about 5% in the last month and is paying a rather attractive 4.7% dividend yield. Picking up some shares now when the market is weak, yet past the lowest part of the trough could be a good move.
Rio Tinto Limited (ASX: RIO)
The iron and coal producer has weaker commodity prices on both sides, but from its massive scale it has the lowest costs, especially for iron ore. It and BHP Billiton Limited (ASX: BHP) are ramping up iron ore production to keep up revenues, but that also depresses ore prices from excess supply and hurts smaller competitors’ profit margins. It has the classic competitive advantage of being a low-cost producer with wider profit margins to survive.
Rio Tinto CEO Sam Walsh said when it comes to low costs, his company will be the last man standing. That could mean it will be the first of the stocks to rise when mining picks up again. Although promising, I still like BHP Billiton better because it has an expanding oil and gas business to offset the mining weakness.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
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