Are ASX mining shares cheap now or are they value traps?

The resources sector is suffering from lower commodity prices this year. Is it a great time to buy some bargains?

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Yes, last year was outstanding for ASX mining shares. But this year has been a different story.

Commodities across the board have seen their prices plunge. Iron ore is down, lithium is down, oil is down.

And accordingly, the stock prices for the companies that mine those minerals have plummeted.

So does this mean that we're now at a great time to buy these resources shares for cheap? Or are they a trap, with further falls to come?

Morgans senior analyst Adrian Prendergast had some ideas this week.

Why are resources down at the moment?

Firstly, let's take a look at why commodity prices are so depressed at the moment.

In the Western world, the answer is obvious. Steep interest rate rises over the past year have strangled economies, so the demand has simply cooled.

The surprise, for the Morgans team, is that China's much-anticipated post-COVID rejuvenation hasn't quite happened.

"The current selloff follows a late 2022 surge in share prices across the resources sector, driven by what we saw at the time as over optimism towards the prospects of a China recovery," Prendergast said on the Morgans blog.

"Not that we are China bears, we just do not like paying upfront for a demand recovery without being able to see it."

The Morgans team remains "cautious" on the prospects of a Chinese economic revival.

"But equally we believe this is priced into resource equities, leaving us confident that we see value in the sector but preferring safety over upside potential."

In fact, after Prendergast made his comments, the Chinese Communist Party surprisingly cut a bunch of different policy rates on Tuesday. Bloomberg reported that this could be a precursor to reducing the main lending rate on Thursday.

Which mining stocks have the brightest long-term prospects?

As a "contrarian call", Prendergast is bullish on iron ore.

"While China's property market is a critical demand driver for steel, and still depressed, we see enough demand from peaking infrastructure activity and other base load consumption to see demand near balance against supply."

Copper is also a mineral that has a strong future, he added.

"While the short term might remain volatile, we remain robustly bullish on copper's long-term fundamentals — declining average grades mined and limited new supply, against a backdrop of rising copper intensity that is likely to be supercharged by the electrification mega trend."

And, believe it or not, coal is the third commodity that's "in solid long-term shape".

"The recent selloff across thermal and met coal prices has been sharp, and in the case of thermal coal we see some further short-term downside to prices," said Prendergast.

"This remains a stark contrast to long-term fundamentals for the coals, where ESG pressures and other sector headwinds [have] seen supply increasingly constrained."

So which are the specific ASX mining shares the Morgans team loves at the moment?

"Amongst large caps our top preferences include BHP Group Ltd (ASX: BHP) (most preferred), Mineral Resources Ltd (ASX: MIN) and Santos Ltd (ASX: STO)," he said.

"While in small caps some of our key picks include Karoon Energy Ltd (ASX: KAR), Whitehaven Coal Ltd (ASX: WHC), Strandline Resources Ltd (ASX: STA) and Panoramic Resources Ltd (ASX: PAN)."

The Morgans team expects that shareholder returns would remain a priority for the larger players.

"Driven by earnings or cash flow, these dividends could be volatile, but we expect them to remain comfortably above the market."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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