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Mining services shares are tripling on the commodity rebound

mining

The ASX 300 metals and mining chart is still trending upwards from the low in June this year and is up 25% at 3,417 points.

Iron ore prices are strengthening and if it keeps going it could possibly break trendlines of around US$70 per ton.

Iron ore revenue accounts for around 40 percent and 30 percent respectively of the two biggest miners; BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), that account for more than half the mining index.

If prices keep rising this will lead to more capital expenditure and benefit mining services companies.

There have been a few mining services companies that have done well in recent years including:

Cimic Group Ltd (ASX: CIM), which is up 254%, since a low of $14.30 in July 2013.

RCR Tomlinson Limited (ASX: RCR) has shot up 276% since a low of $1.10 in February 2015 to $4.18.

NRW Holdings Limited (ASX: NWH) is up 184% from a low in February 2016.

One thing these companies all have in common is that they have diversified business divisions and CIMIC is in over 20 countries worldwide. RCR Tomlinson has exposure to the solar market and this will provide many opportunities for the company in the future.

The mining services sector provides all kinds of services to miners, such as engineering, equipment, mining software, drilling services, and infrastructure as the main ones.

Mining itself is a capital intensive and depleting business, but mining services that provide engineering, mining consulting, and software services through all stages of the mining cycle are not.

Otherwise known as the ‘Pick and shovel play’, an expression that was derived from the California gold rush, where many of those who profited did so by providing the miners with picks, shovels, and other equipment needed for gold mining, as opposed to those who mined themselves and often did not find any gold.

When looking at mining services companies, a diversified business, with low debt, that can ride through cyclical downturns is a good starting point.

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Motley Fool contributor Christopher Coe has no position in any stocks mentioned above. 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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