The key commodities of the world:- gold, oil, and iron ore are all falling in price.
This situation has created lots of headaches for the governments and mining companies, but could present a golden opportunity for investors to get their hands on some quality mining shares at dirt cheap prices.
The nature of mining business is cyclical. In other words an economic slowdown could directly impact the demand for commodities. This is the case with iron ore, as the Chinese economy slows, Australia's iron ore exports to China are impacted and thus the price of iron ore has slumped.
Not long ago, iron ore's price per tonne was trading above US$100, but today it is a possibility that the price could fall as low as US$30. Major Australian iron ore mining companies like Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) have seen their share prices plunge as they forecast lower profits due to falling iron ore prices.
BHP's share price has dropped below $18 for the first time in a decade and was trading close to $17.90 today. Rio Tinto is trading close to $44 today – at its peak in 2005 it was trading around $150. The low valuation of such quality mining companies is an opportunity to get exposure to mining stocks.
The oil price has been going south as well for a while now. Major Australian oil companies, like Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) have been severely impacted with their share prices tanking in a big way. The oil price is dropping because of an oversupply of oil, partly due to the shale oil revolution.
The gold price is keeping up to pace with oil and iron ore, and has also fallen to a five-year low. The factors impacting the gold price are the possibility of higher interest rates in America, and slowing demand from the gold markets of India and China. Again this has opened up an opportunity for investors to buy shares in some quality gold mining companies at a discount and Newcrest Mining Limited (ASX: NCM) is one of them.
| Company Name | P/E ratio | P/B ratio |
| BHP Billiton Limited (ASX: BHP) | 20.47 | 1.13 |
| Rio Tinto Limited (ASX: RIO) | 20.65 | 1.36 |
| Woodside Petroleum Limited (ASX: WPL) | 8.74 | 1.17 |
| Santos Ltd (ASX: STO) | N.A | 0.49 |
| Newcrest Mining Limited (ASX: NCM) | 16.45 | 0.98 |
Source: Google Finance
As evident from the above table, the Price to Book ratio or (P/B) of four of these top mining companies is almost close to one, only Santos has less than half of one. A P/B ratio close to one for five of the major mining companies is a clear indication that the sector is cheap and could be a bargain, as these mining companies own some of the best mining assets in the world.
One factor that is helping the mining sector is the falling Australian dollar, which is forecast to fall maybe as low as 60 US cents. The falling Aussie dollar will help mining companies recover some lost profits.
Foolish takeaway
Some of Australia's best mining companies are available at cheap prices. The mining sector is going through a cyclical downturn. Could it get worse? Or will commodity prices continue to fall? It is difficult to answer, as no one knows what will happen tomorrow. So an investor seeking diversification might benefit by adding quality mining shares at a bargain price in my opinion.
