The resources industry can be difficult to invest in because so much of the time business models are either black or white. They're either a complete failure or absolute success – there's very little grey area in between.
That's partly because mining companies aren't like their industrial counterparts such as Telstra Corporation Ltd (ASX: TLS) or CSL Limited (ASX: CSL) – who can apply a premium to the cost of their products – because they operate in a price taking industry.
It's essential therefore to buy either a highly prospective explorer which has competent management, sound financials and maybe a significant tenement, or an extremely low-cost producer. What's more, if the commodity they produce, or aim to produce, is already a significant way through its super cycle, you seriously need to consider whether, or not, they'll be able to get a project off the ground or meet its cash flow forecasts, before global supply ramps up and applies downward pressure to spot prices.
If you need any more proof of how devastating it can be if you fail to adhere to the above, take a look at "Australia's 5 biggest stock losers of 2014" and you'll see what can happen to mining stocks in short periods of time.
However, buying the right resources stock can make a significant difference to your portfolio (and your financial well-being).
Here are three blue-chip resources stocks you need to keep a close eye on.
1. BHP Billiton Limited (ASX: BHP). Ok, it's hardly an original idea but for risk-averse investors BHP is perfect exposure to the resources sector. It has a focus on four major commodities including copper, iron ore, coal and petroleum. It is forecast to pay a 3.4% fully franked dividend.
2. Rio Tinto Limited (ASX: RIO). Our biggest iron ore miner has a very low cost base and is busy increasing production of the steelmaking ingredient. Its performance has been hampered in recent years by write-offs in its Aluminium division. Investors will be hoping history doesn't repeat itself when the miner reports its half-yearly results next month.
3. Independence Group NL (ASX: IGO) is a mid-cap diversified nickel, gold, copper and zinc miner which has risen over 50% in the past year. With nickel having risen from around $US14,000 per tonne to nearly $US19,000 per tonne in the past year and the gold price sitting around $1,430 per ounce, the market is expecting big things from Independence Group in the next few years. So am I.
3 high-risk/high-reward resources stocks
