Resources stocks are inherently riskier than their industrial peers because sales, profit and share prices are largely determined by the price for the commodities they produce.
That's why diversified miners such as BHP Billiton Limited (ASX: BHP) – currently trading on a forward price-to-earnings (P/E) ratio of 13 – command a higher price than single-commodity producers such as Fortescue Metals Group Limited (ASX: FMG) – currently trading on a forward P/E ratio of 4.
Despite the obvious benefits of buying a diversified miner, they're not all a standout buy (as you'll see below).
For example Rio Tinto Limited (ASX: RIO), the world's second largest iron ore miner, is often considered one of Australia's premier diversified miners but what makes it diversified? With over 90% of its FY13 underlying earnings coming from iron ore and some of its other businesses struggling to breakeven, I wouldn't consider it diversified. With the iron ore spot price falling over 26% in value this year alone, it's no wonder its shares trade on a P/E ratio of just eight yet continue to fall. Unless you feel the forecast drop to $US80 per tonne (currently priced around $US98 per tonne) is already baked into its share price, I'd stay clear of this diversified miner, for now.
Beach Energy Limited (ASX: BPT) is the biggest oil and gas producer in Australia's Cooper Basin and our country's sixth-largest overall. The finite amount of oil and gas means producers such as Beach need to keep strong balance sheets and find new deposits to fulfil their desire to increase production in the long term. With increasing production in FY14, $404 million in cash, 93MMboe in 2P reserves and capable management at the helm, Beach Energy could provide healthy exposure to this booming industry.
Another miner who knows all too well what a falling commodity price can do to share prices is Silver Lake Resources Limited (ASX: SLR). After a tremendous fall in the gold price throughout 2013, shares fell from over $1.00 to their open today at only $0.39c. With its higher cost Murchison mine moving to care and maintenance, I believe it'll be at least 18 months until shareholders see any meaningful (positive) earnings per share. However for those willing to wait it out, and as long as the gold price stays above $1,300/oz, the share price will likely appreciate.
