ASX resources shares are one of the more controversial sides of the ASX. Despite the likes of BHP Group Ltd (ASX: BHP), Woodside Petroleum Limited (ASX: WPL), Fortescue Metals Group Limited (ASX: FMG), Newcrest Mining Limited (ASX: NCM) and Rio Tinto Limited (ASX: RIO) occupying large swathes of the S&P/ASX 200 Index (ASX: XJO), many ASX investors avoid the sector at all costs.
Whilst mining and drilling companies have the potential to deliver windfalls to their shareholder owners, they are not without their flaws.
As such, many investors simply avoid the ASX resources sector on principle. They might not like the resources industry period, perhaps through concerns over climate change or other ethical reasons. Or they might not be enthused from a business standpoint at how resources companies are almost always 'price-takers'. By this, we mean that a resources company has no say over what price it is able to sell its products. It doesn't matter how good iron ore is from one of BHP's sites, it will still command what the worldwide iron ore price is at the time. Contrast this with a company like Apple Inc. (NASDAQ: AAPL), which can control its own destiny by charging whatever it likes for its iPhones.
A good year for ASX resources shares in 2020
Even so, there's no doubt that 2020 has been a good year to own most mining companies outside the oil space.
Take Fortescue Metals. Whilst the ASX 200 index is still down more than 12% for the year, the Fortescue share price is up around 67%.
And while the likes of Commonwealth Bank of Australia (ASX: CBA), Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD) have spent 2020 mauling their dividend payments, the cash continues to flow out of Fortescue, BHP, Newcrest and Rio (albeit with varying degrees).
But ASX resources shares also have a problem: most of them are highly cyclical companies that rise or die on the back of the prices of the commodities they extract. If the iron ore price halved tomorrow, you can expect the share prices of any iron ore miners to join it over the cliff. The only reason 2020 has been kind to the resources sector is that most commodities' prices have held up remarkably well in the face of the coronavirus pandemic.
So how does one invest in such a controversial sector? Well, I think there's a nice balance to be struck for anyone who wants a slice of the bounties of our natural resources in their portfolio.
The 'old BHP'
It involves investing in the 'old BHP'. See, BHP used to be a much larger company. But it split off some of its divisions in 2015 into a new company – South32 Ltd (ASX: S32). Today, the 'new BHP' focuses primarily on 4 commodities – coal, iron, petroleum and copper. South32, in contrast, holds 'everything else' that BHP used to be involved in. That includes magnesium, aluminium, silver, lead and zinc operations across the world.
By holding both of these shares in your portfolio, you would hold a highly diversified and balanced exposure to the ASX resources sector – one that would be far less exposed to the ups and downs of the commodity pricing cycle than a single-resource pureplay like Fortescue or Woodside. If I were to expose my portfolio to the ASX resources sector, this is the strategy I would personally use. You might not get the highs of a single commodity pricing boom, but not being exposed to things going the other way is your compensation.
