Given the trajectory of a number commodity prices over the past five years, I've heard of many investors selling off their resources shares to move into "safer" industrial stocks.
But rather than sell, I think now is the right time to move into the mining and resources sector. The share price movements of a number of my favourite miners have already proven why now could be a great time for every investor to get some exposure.
First, if anybody tells you to avoid resources stocks because commodity prices are 'volatile', they shouldn't be giving you advice. Everybody knows this. Commodity prices will always be volatile and there's plenty of money to be made in the industry if you're willing to look hard enough.
For investors considering getting some exposure to the sector, chances are, the first three companies you'll consider buying are BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Woodside Petroleum Limited (ASX: RIO). Here's what you need to know about each.
BHP is Australia's biggest company. And for good reason. With its origins dating back more than 150 years, it has continuously grown into a stronger organisation, year-after-year, one commodity super-cycle after another. In coming years, it is focused on increasing shareholder returns by stripping costs and debt and focusing on four key commodities. Namely copper, petroleum, iron ore and coal. It is forecast to pay a dividend equivalent to 3.6% fully franked, yet trades at modest prices. I think it is a solid long-term buy.
Rio Tinto is my favourite blue-chip mining stock at today's prices because I believe it is past the worst of its write-downs and the potential for further falls in the iron ore price is fully baked into the current share price. With extremely low-cost production, Rio will survive under the lowest forecasted prices. However, with significant long-term growth prospects in both the aluminium and copper divisions, I feel Rio's dependence upon iron ore will slowly fall (in the long term, not the immediate future). It will also tap into the eventual rise in other commodity prices such as coal, uranium and aluminium.
Woodside Petroleum has been at the opposite end investors' sentiment. Its share price has performed exceptionally well over the past three years thanks to management's payment of huge dividends and extra returns to shareholders. However, a number of significant considerations must be given to Woodside today. For example the company's former flagship growth prospect, the giant Leviathan gas field off the coast of Israel, has been dropped. Even more recently, management's attempt to buyout substantial shareholder and rival, Royal Dutch Shell Plc (ADR) (NYSE:RDS.A) (NYSE:RDS.B), was knocked back by the myopic institutions on Woodside's share registry.
The move would have finally freed Woodside from Shell's influence but now the foreign oil and gas heavyweight might resort to other, uncertain, methods to divest its significant ownership. Until Woodside offers more certainty over the Browse FLNG project and we can get a better understanding of Shell's intentions, I think our biggest independent oil and gas producer deserves a 'Hold' rating.
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If you're thinking of expanding your portfolio into the resources sector, I think both Rio and BHP will provide good exposure for those more risk-averse investors. Each have very low production costs (a big tick for any miner), diversified commodity bases and are busy paying down debt.
