Investing in resource stocks puts many investors off and many more simply won't touch them on principle. Stories of failed resource start-ups litter the broken dreams of many speculative investors and many still remember how the GFC smashed our 'market darling' iron ore miners to smithereens (although anyone who held on would have been cheering through the mining boom of 2009-2012).
However, there are a few simple rules which if followed, can give investors (in my opinion) some certainty and hopefully some returns when it comes to ASX resource stocks.
Rule 1 – Stick with mainstream commodities (unless you know what you're doing). Yes, I know your best friend tells you that the future is electric cars that will all be using graphite, cobalt and lithium, but for most of us, it's best to stick with mainstream commodities like iron, gold, copper and oil. There is a reason most of the biggest ASX miners all deal with at least one of these commodities. Demand patterns are usually more predictable and not subject to industry-specific swings.
Rule 2 – Only invest in companies with low, sustainable cost-bases. An iron ore miner like Fortescue Metals Group Ltd (ASX: FMG) has a cost-base of US 12.36 per tonne. As the current price of iron ore is north of US $100 per tonne, you know that Fortescue is not likely to go broke mining iron anytime soon. Fortescue and other iron miners like Rio Tinto Ltd (ASX: RIO) have demonstrated consistently low cost-bases and so give me confidence in their abilities to keep the ship tight through feast and famine.
Rule 3 – Buy Low, Sell High. It sounds simple, but many investors ignore this golden rule. Commodity prices are very cyclical and the big money follows them. You will see cash piling into gold miners like Newcrest Mining Ltd (ASX: NCM) when gold is rising in value and vice versa. These trends are predictable and ever-repeating. You could be a contrarian and buy Newcrest or Woodside Petroleum Limited (ASX: WPL) when the gold or oil price is low, wait for the tide to turn and sell when others are buying. Rinse, Repeat.
Foolish Takeaway
If you follow these rules, in my opinion, you have a good chance of making some good returns with ASX resource stocks. Make sure you do the research on the companies and commodities you are looking at and you will start to see what to look out for.
