Why these are my favourite resources shares on the ASX

In order to maintain a truly diversified portfolio I think a little exposure to the resources sector is necessary.

And with the global economy forecast to grow strongly this year and next, now could be a great time to gain this exposure.

To help you narrow down your selection from the multitude of options, I have picked out my favourite two shares in the sector at the moment. Here’s why I like them:

BHP Billiton Limited (ASX: BHP)

I think that BHP would have to be one of the best options in the sector due to the overall quality of its assets and its generous dividend yield. I remain optimistic that the mining giant has at least a couple of stellar years ahead of it due to the strength of the global economy and the impact that this will have on demand and prices for the commodities that BHP is exposed to. Ultimately, I believe this will lead to a strong earnings growth and the potential for a large increase in its dividend. At present BHP’s shares provide a fully franked trailing 3.4% dividend. The miner’s first-half results are due this week, so investors may want to hold off until they have been released.

Galaxy Resources Limited (ASX: GXY)

The lithium miner industry may be one of the most volatile on the market, but investors with a high tolerance for risk might want to consider Galaxy Resources. I believe its assets are amongst the best in the industry and I have been very impressed with the quality of its production at Mt Cattlin. I believe this operation has the potential to be a real cash cow for the Galaxy, leading to high levels of free cash flow. There are also rumours floating around that BMW may be about to sign a sizeable offtake agreement with the company. Considering all planned production at Mt Cattlin has been snapped up already, this would mean that Galaxy would have to bring on line either its Sal de Vida operation in Argentina or James Bay operation in North America. This could give its earnings profile a huge boost in the near future if it proves to be the case. In light of this, I would choose Galaxy ahead of lithium miner peers Orocobre Limited (ASX: ORE) and Pilbara Minerals Ltd (ASX: PLS).

But if Galaxy is too high risk for your tastes then these exciting companies could be better options. I believe they offer a compelling/risk reward at their respective share prices.

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Motley Fool contributor James Mickleboro owns shares of Galaxy Resources Limited. 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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