Value investors seldom think of ASX resource shares as a good investment. This is for several reasons. Resource companies are price takers not price makers like (say) Apple Inc (NASDAQ: AAPL). In general, this is true.
However, if you are willing to put in the effort, you can find definite long term value in ASX resource shares.
Good ore bodies make good resource stocks
BHP Group Ltd (ASX: BHP) was propelled to its current size by the gigantic ore bodies – iron ore deposits in the Pilbara, the Escondida copper mine, and the multi-commodity Olympic Dam.
Newcrest Mining Limited (ASX: NCM) is powered by its Cadia mine site. Newcrest reported an all in sustaining cost (AISC) of $137 for Cadia in its 2020 Q3 results, making it one of the cheapest gold producing mines in the world.
These factors produce a distinct competitive advantage for these ASX resource shares, regardless of where the commodity price is in its cycle. It provides companies the free cash to pursue replacement tonnages.
Strong dividend payouts
At today's share prices, resource companies are among the best paying dividend companies on the ASX. At the time of writing, Yancoal Australia Ltd (ASX: YAL) has a massive dividend yield of 14.68%, New Hope Corporation Limited (ASX: NHC) pays 10.6%, and Fortescue Metals Group Limited (ASX: FMG) pays 9.27%.
In the case of Yancoal, this means an annual dividend of (say) $1,468 on an investment of $10,000. This is the sort of dividend yield that produces replacement income. The secret to high dividend yields in resource companies is to purchase shares when the price-to-earnings ratio is low.
Great entry points
Unlike other companies, resource stocks will definitely provide investors with an attractive entry price if they are patient enough. Resource companies in particular must be purchased at a good price. Buying at the top of the market is almost courting disaster. If you buy at the low point in the market you can weather price falls and down cycles.
Sandfire Resources Ltd (ASX: SFR) is a good example of this. The Sandfire share price has lost 29% year to date, yet the company itself remains unchanged and the market for copper is starting to break a long down cycle.
Foolish takeaway
Investing in resource companies is a very lucrative path if you are disciplined and follow a few easy strategies:
- First, look for companies with a competitive advantages bestowed by the ore body being mined.
- Second, look for high dividend yields relative to the price of purchase.
- Third, do not buy at the top of the market. The top of the market is generally marked with high enthusiasm, high P/E ratios and "Buy" recommendations everywhere. Conversely, the bottom of the market is generally marked with negative articles, low P/E ratios and pessimism.
