As all Aussie investors know, recent months have been hugely challenging for mining and resource stocks. The prices of commodities have fallen heavily, with market sentiment falling to reach a low ebb.
However, for long term investors, now could be a great time to consider buying companies in the sector ahead of potentially more prosperous times. Therefore, is now the right time to buy these three mining stocks? Or, should you wait for further price falls?
BHP Billiton Limited
The recent operational update from BHP Billiton Limited (ASX: BHP) was well-received by investors (its shares rose by 2% on the day), with the company deciding to cut oil production in the next financial year and reduce its exploration budget by 20%.
This seems to be a sensible response to the falling oil price and, with shares in BHP having themselves declined by 26% in the last year, now could be a good time to buy. That’s because they trade on a price to earnings (P/E) ratio of just 11.5, which is considerably less than the ASX’s P/E (14.8) and the materials sector’s P/E (12.1). As a result, BHP could see its rating upgraded over the medium term.
Rio Tinto Limited
The fourth quarter production report from Rio Tinto Limited (ASX: RIO) showed that the company increased production of iron ore by 12% versus the same period in 2013, and this took total production for the year to 295.4m tonnes, which is 11% higher than in 2013.
Despite this, a lower iron ore price means that Rio’s bottom line is forecast to fall at an annualised rate of 23.5% over the next two years. While disappointing, this presents investors with a major opportunity to buy shares in Rio while they are very cheap. For example, a forward P/E ratio of just 12 and a yield of 4.4% both indicate that its shares offer excellent value and could rise in price moving forward.
Fortescue Metals Group Limited
Also suffering from a lower iron ore price is Fortescue Metals Group Limited (ASX: FMG). Its shares have slumped by 59% in the last year and, even though its bottom line is forecast to decline to just 23% of its 2014 level by next year, its shares seem to offer excellent value after such a large fall.
For example, even after taking into account the forecast reduction in profitability, shares in Fortescue still trade on a P/E ratio of just 10.8, and with a dividend yield of 4.4% set to be covered twice by profit, Fortescue could deliver surprisingly strong share price gains over the medium term.