6 hot resources stocks on investors’ radars

Credit: iStock

You’d have to have been living under a rock to have missed the remarkable rally by many of the ASX’s small and mid-cap mining stocks in late February and March.

From their lowest to highest points in 2016 so far, here are some of the top performers:

  • Fortescue Metals Group Limited (ASX: FMG) up 128% from $1.44 to $3.29
  • St Barbara Ltd (ASX: SBM) up 100% from $1.34 to $2.68
  • OZ Minerals Limited (ASX: OZL) up 62% from $3.45 to $5.60
  • Santos Ltd (ASX: STO) up 63% from $2.48 to $4.05
  • Breaker Resources NL (ASX: BRB) up 200% from 9 cents to 27 cents
  • Beach Energy Ltd  (ASX: BPT) up 122% from $0.35 to $0.78

What does this mean for investors that missed out?

An interesting trend of the last few weeks has been the number of analysts that have jumped on the resources train.

The iron ore and (to a lesser extent) the oil price have improved significantly, however, the current enthusiasm could end up being met with despair in a few months time if a few theories don’t end up eventuating.

Here are 6 points investors need to weigh up before investing in resources:

  • Much of today’s analysis is based on significant global events occurring; I’m not a master of world politics but I find it difficult to believe that many of the assumptions will come true.
  • Assumption 1: Russia and the OPEC nations will agree to curb or even reduce oil production to support the oil price. Counter: These are people/countries that have accepted a low oil price for quite a long time already and appear content playing the long game with the US, why would they crimp production now when US oil production appears to be decreasing?
  • Assumption 2: China will continue to demand more steel, which will support a higher iron ore price like we’ve seen in the last 6 weeks. Counter: Some analysis has pointed to the increase in steel price being due to restocking, I’m yet to see any hard analysis that fundamental demand will materially increase or even remain steady.
  • Assumption 3: The gold price will remain strong due to uncertainty (terrorism etc): Counter: I have no counter to this, but I guess terrorist events could decrease.
  • Almost every commentator is noting it’s a ‘long-term’ play to invest now. Do you see yourself holding a company like Fortescue through the ups and downs for up to seven years?

Others have pointed out that investors should get in now with the view of reaping the rewards from superior income in future years. This seems a silly strategy when yields of over 7% are available from the relatively safe banks.

Forget resources stocks for income!

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Motley Fool contributor Andrew Mudie owns shares of Fortescue Metals Group Limited. You can find Andrew on Twitter @andrewmudie

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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