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Why I’ve changed my mind on ASX resources shares

I’ve never really been too interested in ASX resources shares. Mining companies, oil companies, you name it, nothing really got my blood boiling in the resources space.

Why? Well, resources companies are ‘price-takers’ for one – meaning they have no control over what price they can sell their own product at. This is obviously a serious disadvantage, as many of the world’s top companies have gotten to where they are by the pricing power their brands allow (just think of the brand premium Apple commands).

But no one pays a premium for the oil that BHP Group Ltd (ASX: BHP) extracts compared with Oil Search Limited (ASX: OSH) or Beach Energy Ltd (ASX: APT). It’s all the same ‘black stuff’.

Thus, resources shares usually have to compete on cost alone. A gold miner, for instance, is only as competitive as its cost base.

What’s the appeal of ASX resources shares then?

Here’s why I’ve relaxed my hostilities to resources shares in 2020 – and even own one myself now. A resource company represents something tangible, something that nothing and no one can take away from it. Not the coronavirus, not the changing consumer preferences for a product, and not technology.

When push comes to shove, most mining companies own the land they own, and everything underneath it. Therefore, they own a deposit of something valuable, something with utility which will always be needed by human society.

Let’s dispense with the oil example for a minute (as I think getting humans to use less oil is imperative for our future).

Let’s instead focus on things like gold, silver, copper and iron. These are the foundations of our modern, industrialised world. We simply can’t build buildings, cars, machinery, infrastructure, electronics or computers without various combinations of the above commodities.

And a mining company that forever has a pile of 1 or more of these commodities ready for extraction and use is at a huge advantage – they are a company backed by a store of tangible, incorruptible wealth. Just think of gold miner Newcrest Mining Limited (ASX: NCM). Newcrest estimates it has over 38 million ounces of gold mineral reserves at just one of its mines (Cadia). That’s a lot of certainties there in my view.

Yes, the prices of these commodities may fluctuate, but (unlike oil) I can’t imagine a world without steel or copper. I can’t imagine a world where humans aren’t attracted to gold or silver. And that gives these companies a unique advantage over almost every other company out there.

Foolish takeaway

I’m still very much aware of the downfalls of ASX resources shares, but I do have a renewed appreciation of the advantages they can bring to the table. I’m still not heavily invested in this sector, but I’m no longer avoiding it altogether.

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Motley Fool contributor Sebastian Bowen owns shares of Newcrest Mining 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 Scott Phillips.

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