I've got bad news, Fools!
It might not come as a surprise but I think there could be more pain in store for resources investors.
"Commodities rout widens," says the Sydney Morning Herald.
First it was coal…then iron ore…oil was next…and now copper…
What's a Fool to do?
Steering clear of the resources sector would've been a good idea… six months ago.
I wish I did, the 50% loss on my Rio Tinto Limited (ASX: RIO) warrants still fresh in my memory.
It's been my most painful investing mistake, bar none.
Unfortunately the resources sector could get worse before it gets better…
Meaning producers large and small, as well as tiny speculative explorers could be in for another volatile year.
What's new?
For years big miners have mitigated volatility in earnings through diversification.
The largest miners such as BHP Billiton Limited (ASX: BHP) decided to diversify their production base across a number of commodities.
The problem for BHP shareholders is the key commodities it focuses on as part of its 'Four Pillars" strategy include coal, iron ore, oil and copper.
Watch out below…
Mike King, an analyst for Motley Fool Share Advisor, yesterday highlighted that, "In the past year, we've seen iron ore fall more than 30%, oil has dropped 55%, Australian thermal coal has lost 20% in the past three months, and now copper is being slammed."
On the back of a downward revision to global growth forecasts, copper fell 5.2% to $US2.51 a pound, its lowest level since 2009.
In 2014, copper accounted for some 20% of BHP's revenues. It received an average price of $US3.22 a pound.
Source: BHP 2014 Annual Report.
Forecasting daily, monthly or yearly commodity prices is a fool's (lower case 'f') errand, the best anyone can do is take a longer-term view on their sustainability.
Motley Fool Share Advisor's ace stock picker, Scott Phillips, warned Fairfax readers way back in 2012 to avoid iron ore miners, "I've written before that the impacts of supply and demand don't bode well for iron ore." Since then, the steel-making ingredient has crashed.
Therefore, it should come as no surprise to know he hasn't recommended BHP – or any other miners – to Motley Fool Share Advisor members.
However Scott's on record as saying he'd consider taking a second look at BHP, if its share price dropped below $25.
Down 1.07% today, at $26.91, BHP is starting to look tempting. Especially, with its trailing 4.7% fully franked dividend.
CEO Andrew MacKenzie has also made a promise, "To at least maintain or grow our progressive base dividend in every reporting period." That's good news for potential shareholders like me.
Even so, I'm not holding my breath.
Because despite his best intentions, plummeting commodity prices may force him to rescind his promise of maximising shareholder returns.
One current BHP shareholder, Motley Fool General Manager Bruce Jackson, has seen this before but knows time is on his side. Commenting on the heavy falls in the oil price he acknowledged, "It is simply a matter of time before supply and demand are back in sync." Bruce said, "The unknown is how long it will take."
Analysts at Goldman Sachs say oil will trade close to $US40 per barrel within three months. Currently Brent crude fetches $US48.
Iron ore, currently $US68.30 per tonne, is still above the government's forecasts of $US60 for 2015.
Overtime however a slowdown in China – which demands 67% of the world's supply according to the Bureau of Resources and Energy Economics – poses a downside risk.
Finally, according to copper analysts at Wood Mackenzie, "95% of the global copper mining industry is still operating at a profit." If that's correct, further falls could be on the way.
Volatility brings opportunity
If all my years of investing experience have taught me anything, it's to be prepared…
For share price crashes, market declines, price slumps and times of heightened volatility.
Indeed it's in times like these when you're most likely to catch a bargain.
As an example Telstra Corporation Ltd (ASX: TLS), the crown jewel of ASX-listed dividend stocks, yesterday reached a 13.5-year high of $6.19.
However just four years ago its shares were down in the dumps, having fallen nearly 40% in the prior four years, it was sporting a price tag of around $2.64.
For long-term focused investors, it offered significant value, including a trailing fully franked yield over 10.5%.
Shares now trade on a trailing yield of 4.8%, fully franked of course. You pay a very high price in the sharemarket for a cheery consensus.
Now I'll admit BHP isn't such a clear cut bargain as Telstra was four years ago, but it's certainly cheaper than it was six months ago.
It could be time to take a second look.
