It’s hard not to panic when you see mining stocks take a big hit as the sell-off cemented the sector as the worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) today.
The share prices of BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO), Newcrest Mining Limited (ASX: NCM) and South32 Ltd (ASX: S32) got sold off sharply at the open as commodity prices took a spill in overnight trade.
Contagion fears in emerging markets, escalating trade tensions between the largest global economies and the surge in the US dollar have all conspired to bring the resources sector to its knees.
But this isn’t the time to panic. I am expecting the sector to recover reasonably quickly from the sell-off for a number of reasons.
Firstly, the price action towards the end of the trading day when almost all mining stocks rallied off their intraday low is giving me confidence that the sell-off is mostly a blip.
The big tumble in commodity prices also looks to be more driven by sentiment than fundamentals. The demand and supply outlook for metals hasn’t changed and economists point to China’s flexibility to stimulate its economy as a supportive factor for the sector.
Fund managers interviewed by the Australian Financial Review have also expressed a similar view. They think the meltdown is mostly noise and are urging calm.
The broad-based sell-off in the sector is also telling. Steel maker BlueScope Steel Limited (ASX: BSL) suffered a beating even though it is well placed to benefit from the escalating trade tensions (click here to find out why).
Those that worry the volatility will prove to be enduring should buy shares in miners that sit at the lowest end of the cost curve instead of quitting the sector altogether as I think resources will continue to outperform the broader market in FY19.
The miners with the cost advantage will come out best from the mess and these include our biggest listed producers BHP and Rio Tinto. You can also add OZ Minerals Limited (ASX: OZL), as its results today showed it’s one of the best placed copper plays on the market.
Another advantage of owning these low-cost producers is that they have very strong balance sheets and are likely to pay a special dividend or undertake/expand share buybacks over the next 6 to 12 months.
What’s more, the waning Australian dollar will afford some protection to the bottom lines of our miners, particularly those with significant domestic operations. Stay overweight in the sector as its strong run isn’t over!
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, BlueScope Steel Limited, Rio Tinto Ltd., and South32 Ltd. 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 Scott Phillips.