Is it time to pounce on Santos Ltd and Rio Tinto Limited?

Credit: Grange Resources presentation

With the S&P/ASX 200 (INDEXASX: ^AXJO)(ASX: XJO) being sold off so heavily in recent weeks, it was inevitable that we would see a larger than usual number of companies hitting 52-week lows this week.

Factor in the recent collapse in resource prices, and today’s list of losers won’t come as a big surprise to most readers:

Santos Ltd (ASX: STO) – last traded at $2.68, down 59% for the year

With oil falling as low as US$28 per barrel in recent days, Santos shares have copped a pasting – down 22% in the past month alone, or 77% in the past five years. Existing shareholders should brace for further volatility, as Santos’ most recent third-quarterly production figures showed an average realised oil price of A$71 per barrel, which is substantially above today’s prices.

Speculators might be tempted to take a punt, although as I noted in this article yesterday, there could be worse to come for the oil market and Santos.

Santos lists its Unit Cost of Production as A$14.2-$14.6/barrel, plus depreciation, depletion and amortisation expense of A$17.5-$18.0/barrel, and capital expenditure (A$1.8 billion) forecast for the 2015 financial year.

These figures make margins look quite slim based on the current price of oil. I would suggest investors wait for the full-year report and the company’s take on what to expect in 2016 before buying any more Santos shares.

As a side note, shares in Woodside Petroleum Limited (ASX: WPL) and Origin Energy Ltd (ASX: ORG) also hit new 52-week lows this week after the oil price collapse.

Rio Tinto Limited (ASX: RIO) – last traded at $38.82, down 28% for the year

Like Santos, Rio continues to suffer from weak commodity prices, losing 54% of its value in the past five years. Unlike Santos, the average realised price received for its goods is closer to market value, which indicates the worst hits to earnings could be behind shareholders (unless the market falls further, of course).

According to Rio’s latest fourth-quarter update, the company received an average of $48 per wet metric tonne on an FOB (Free On Board) basis for iron ore, its main product. Rio didn’t specify, but I assume this figure is in US dollars. Also, 59% of sales were actually on a Cost and Freight basis (including costs of freight), not FOB basis which means the final results could differ.

Whether the worst is behind Rio depends on the iron ore market, the outlook for which is uncertain. Global supply is still growing slowly and with a big question mark over Chinese demand, I wouldn’t be surprised to see Rio shares head lower in the near term.

Shares in Fortescue Metals Group Limited (ASX: FMG) also hit a new 52-week low in trade on Monday, while BHP Billiton Limited (ASX: BHP) is trading within 30 cents of its most recent low.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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