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How much further will BHP Billiton Limited, Rio Tinto Limited and Fortescue Metals Group Limited fall?

It was carnage amongst the mining sector on the ASX on Wednesday. While the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) slumped a serious 1% – despite Wall Street hitting a new record high overnight – the falls amongst miners exposed to iron ore were even more significant.

At the close BHP Billiton Limited (ASX:BHP), Rio Tinto Limited (ASX:RIO) and Fortescue Metals Group Limited (ASX:FMG) had lost 2.8%, 1.8% and 2% respectively.

Surprisingly, the falls follow a steadying in the iron ore price at US$75.90!

The losses experienced by a number of the more exposed junior iron ore miners were even more troubling. Atlas Iron Limited (ASX: AGO), BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX) fell 14.3%, 10.4% and 4.7% respectively.

Decision, Decisions

With all six of these iron ore producers now trading either at new 52-week lows or close to their yearly lows, some investors are surely facing the predicament of whether to ease their pain by selling out now or whether to hold on and hope for an eventual recovery.

It’s a very difficult decision faced by resource investors and without a crystal ball to help them determine future commodity prices, valuing these stocks is a tough ask.

Only the lowest cost producers may survive

Without knowing whether or not the iron ore price will rebound in the near future, the key for investors exposed to this sector is to own the lowest cost producers.

I recently read a 1976 letter penned by top investor Warren Buffett, while the context of the letter referred to the insurance industry, the content is just as relevant to any other sector, perhaps none more so than resources.

“I have always been attracted to the low cost operator in any business and, when you can find a combination of (i) an extremely large business, (ii) a more or less homogenous product, and (iii) a very large gap in operating costs between the low cost operator and all of the other companies in the industry, you have a really attractive investment situation”

So, while I don’t have a crystal ball either to tell you which way the iron ore price will move, if I was to own any of the iron ore producers right now, I’d be following Buffett’s wisdom and only owning the lowest-cost producers.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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