ASX mining shares – or ASX resources shares in general – are often overlooked by many ASX investors. It's common to hear protestations like 'they're volatile', or 'they're price takers' when discussing the miners.
Now both of these statements are true (and we'll go over why in a minute). But in my view, they don't preclude these shares from making good investments as a part of a well-balanced portfolio.
What are the benefits of owning ASX mining shares?
A well-run ASX miner can bring many benefits to a well-balanced portfolio – most importantly, diversification.
Many commodity markets operate quite independently of the broader economy. How else can you explain the iron ore price today – trading at multi-year highs above US$100 a tonne? Or the gold price – not too far from all-time highs at prices above US$1,700 an ounce?
Most ASX companies are facing significant short-term headwinds as a result of the coronavirus pandemic. But this economic pain has yet to extend to the iron or gold mining sector. That's partly why the Fortescue Metals Group Limited (ASX: FMG) reached a new all-time high just today, for example. Ditto with Evolution Mining Ltd (ASX: EVN).
Large iron miners like Fortescue will probably spend 2020 dishing out record dividend payments to shareholders in a year where most companies are facing pressure to even keep their dividend steady.
As such, anyone with these kinds of shares in their portfolio (especially dividend investors) would be feeling incredibly grateful today.
What to watch out for in an ASX miner
As I touched on earlier, there are a couple of 'Achilles heels' that can make mining a treacherous field to plough.
Mining companies are price takers – meaning they have to accept the sale of their resources at whatever price the market is dictating at the time. This is why mining shares can be so volatile – they rise or die on the back of what the market is willing to pay for their products.
This gives them little control over their profits from year to year.
The best way to counter these inbuilt disadvantages in my view is to invest in the largest, most established miners with the lowest cost-bases.
Take Fortescue for instance. It mines its iron ore with a cost basis of around US$12–13 a tonne. That means it can keep its head above water if the iron price ever plunges – while its higher-cost competitors drown. And when prices are good? It can virtually print money for its shareholders.
Foolish takeaway
Mining shares can be highly volatile and also face structural disadvantages that don't plague most other ASX shares. However, they can also provide invaluable diversification to a portfolio, and so I think any investor (dividend investors in particular) should consider at least some mining exposure.
