It’s a bad time for the resources industry.
Who says?
Everyone says. So it must be true.
But what if it isn’t true?
We’re glad you asked. Everywhere you look, folks are writing off the resource sector and Australian resource stocks.
But what if, rather than being the death of Australian resource stocks, this was actually the time to invest?
The latest news from mining giant Rio Tinto [ASX: RIO] may suggest things aren’t so bad after all…
Yesterday Rio Tinto announced:
‘Rio Tinto has set out its breakthrough plan to optimise the growth of its world-class iron ore business in Western Australia. Mine production capacity will rapidly increase towards 360 million tonnes a year (Mt/a) at a significantly lower capital cost per tonne than originally planned.‘
It’s hard to pick any holes in that news.
That’s a big increase in production. Rio forecasts to export just 265 million tonnes this year. So that’s a one-third increase.
If the increased production came without the margin improvement we would have wondered if Rio was just trying to dump iron ore on the market before a potential fall in iron ore prices.
But right now that doesn’t seem to be the case. In fact, the iron ore price has been surprisingly strong in recent months.
Record Imports for China
The following chart shows the recent state of play:
The iron ore price peaked in 2011. It fell to the recent low point towards the end of last year. Although the chart doesn’t show it, the iron ore price fell below US$90.
Things got so bad for the iron ore producers that Fortescue Metals [ASX: FMG] appeared to be in serious danger of falling foul of its debt covenants. That could have put Fortescue into a real financial fix.
Fortunately for them, they managed to refinance their debt and the share price has more than doubled since.
Now, as with any commodity price, the current price doesn’t always reflect the future price. Things can change. The big buyer of iron ore is still China. No one can guarantee that China will keep buying.
But if the September import numbers are anything to go by, it doesn’t look like China is about to stop iron ore imports or steel production. As Mining.com reported:
‘China imported a new all-time high of 74.58 million tonnes of iron ore during last month (September), up 8% from August and up a surprisingly robust 15% compared to last year.‘
So much for the end of the resources boom.
Back to Basics for Resource Investing
Importantly, this news comes at a time when most people are still extremely negative on resource stocks.
And look, we get that. As bullish as we are on the market, we get it why people are nervous. Resource investors have seen their fair share of booms and busts over the past 10 years.
Then of course there’s the view of resource guru Rick Rule (a view we completely agree with) who says that probably 600 of the resource stocks listed on the ASX are worthless.
The tricky part is to figure out just which ones are worthless and which have value. That’s no easy task.
But even so, we’ve assigned that job to Diggers and Drillers resources analyst Jason Stevenson. He’s on the case now figuring out which stocks investors should buy as they rebuild their resource stock portfolio.
In truth it’s a case of going back to basics. We asked Jason to run his slide rule over two types of resource stock – blue-chip and speculative.
We want to know which blue-chip Aussie resources stock is the ‘best of breed’ on the market right now. We want to know which Aussie resources stock an investor should buy if they’re starting a portfolio from scratch. Jason will share his view with readers in the next issue of Diggers and Drillers.
But that’s not all. We also want to know which speculative stock is the best to own. As we said above, Rick Rule says 600 Aussie resource stocks are worth nothing. It’s up to Jason to filter through the other roughly 600 resource stocks to pick out the winners.
There have been plenty of false dawns for resources stocks this year alone. But if a resources stock rebound is on the way, we want to make sure you’re in the best position to make the most of it.
Cheers,
Kris+
Special Report: The ‘Wonder Weld’ That Could Triple Your Money
