Down 24% in Three Months…is it Time to Buy Resource Stocks?

It’s like late 2008 all over again for the resource sector…it’s bloody marvellous!

You couldn’t describe too many resource investors as ‘excited’ today. But this guy certainly is. He’s a Melbourne-based boutique fund manager who’s made a ‘buck or two’ in mining over the decades.

So why is he excited?

You make the real money by buying low, when something looks putrid…and selling high, when it becomes the new market darling.

And, right now…resource stocks are looking, well…pretty putrid.

Last time the mining sector was as putrid as this, a very simple method let us find stocks that then gained as much as 2,000% as the mining sector bounced back.

So I agree with my excitable friend: the opportunity of buying cheap stocks, and finding another 2,000% gain, is ‘bloody marvellous’ indeed…

So what is it that makes a stock stand out from the crowd, including the one that gained 2,000% in the aftermath of the GFC chaos?

In investing, you can make it complex…or you can keep it simple. I try and keep it simple. The tool I use is – cash.

Let Me Explain…
 

The ASX’s small resource companies live and die by their cash balance. Some have enough to survive for a few years, but many only have enough to survive a few months.

Cash is the ‘fuel’ in their tank.

So when the mining sector turned back up in 2009, the ones with the most fuel in their tank could put their foot to the floor.

Their cash-strapped peers wasted valuable time trying to raise money from a shell-shocked and nervous market.

This is why many of the best-performing, small-cap resource shares in 2009 were also the ones with the best cash balances.

That’s it really, nothing too exotic!

When we played this move in 2009, the top five cashed-up stocks were an obscure and eclectic mix. Nevertheless, on average they had gained 60% just a few months later.

One of the stocks on the cashed-up list was little known; an oil and gas  company  called Buru Energy (ASX: BRU) which had funny ideas about something called ‘shale gas’…at the time few had heard of shale, Buru was off the radar, and the stock traded for just 18c.

But just 2.5 years on, shale was the buzzword, and Buru was trading at $3.78…a 2,000% gain in price.

When the mining sector is down like this, you can let it depress you OR you can look for the kind of smashed-up, cashed-up stocks that investors made a fortune on, after buying the last time the market was this cheap.

And here’s the good bit…

Today’s Market Looks Perfect for the Same Strategy
 

Why? Because mining stocks are so cheap, they are back to GFC valuations again. All boats have gone down with the tide: regardless of how good the project, management, jurisdiction, or cash balance may be…

Mining — the Ultimate Boom and Bust Industry

Source: Bigcharts

When mining stocks bounce back, it will be those with the right stuff – and the cash – that will hit the ground running.

This all assumes that mining stocks will bounce back, of course, which is something I wrote to you about on Wednesday.

I find it hard to see how mining stocks are back to GFC valuations, and even harder to see how mining stocks can stay at these valuations for long. A sharp recovery seems inevitable to me.

It may take a month or two, or maybe longer, no one really knows. The point is that if you take time to get set now, there’s a good chance the market could be finishing off a strong rally in two to three years time.

So now is the time to sift through the bargain bins, looking for the rare gem hidden amongst the garbage.

It’s also the time to check balance sheets, and see who’s out of cash, and who’s not. The March quarterlies are all out now, so I’ll scan them to see how things stand.

The Biggest Question is: What to Invest in?
 

The Australian resource sector is like a supermarket. It’s one of the world’s premier exchanges for mining stocks, and it’s very diverse.

You can invest in stocks to get you exposure to less known precious metals like palladium, niche minerals like diamonds, obscure commodities like vanadium and antimony, long-forgotten uranium, and thorium.

There’s mining service companies, which are all trading at deep discounts. Then there are companies looking into mining technology. With costs rising, any tech that can give producers an edge over their competitors will be highly valuable.

That’s not to overlook the usual candidates like base metals (copper, nickel, tin etc), bulks (iron ore, metallurgical coal and so on), and energy (conventional/unconventional oil and gas, as well as coal), which are all very, very cheap too.

But if I had to pull out a few favourites, the agriculture story looks like it’s going to come back, so think about mined fertilisers like potash and phosphate. In the strategic minerals space, I also think the graphite story still has a long way to run, thanks to the incredible developments in graphite.

And uranium looks like it may finally have its day in the sun too. The megawatts to megatons program expires at the end of the year, so there should be a big gap in supply in early 2014.

I could go on (and on) but I’ll save that for next week’s Money Morning.

But the bottom line is this: if you’re nervous about how high the banks and yields stocks have soared…take a minute to look at the fantastic opportunities opening up for the brave and the patient in resources.

Dr Alex Cowie
Editor, Diggers & Drillers

 

Ed Note: Most investors think that the gold, copper or iron ore in the ground is a resource company’s biggest asset. But it’s not. It’s something much more important than that. In today’s Money Morning Premium, Kris explains why access to this ‘rare’ asset can make or break a company. Click here to upgrade now.

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