3 reasons why we avoid single commodity and single mine resource stocks
Given the market’s current fixation on resource stocks, it’s timely to explain why OC Funds Management avoids single commodity and single mine resource stocks.
First, mining companies outside the S&P/ASX 100 are often single mine owners, typically exposed to one commodity and have a volatile (or nil) earnings stream. We therefore consider them risky investments that are difficult to forecast.
Second, the earnings of these companies (where they exist) is usually heavily reliant on commodity prices and currency movements. Many merely own a resource that is undergoing feasibility and is yet to be mined or even proven.
And third, two key drivers of share price performance for small mining companies are typically exploration success and commodity price movements, leading to a greater level of risk from uncontrollable factors. As such, we don’t invest in companies where the key drivers cannot be reasonably forecast by our analysts due to the excessive risk this entails.
Our portfolios instead gain exposure to the commodities cycle by investing in quality companies that can service the mining sector such as Mineral Resources and MACA Limited. Overall, we remain bearish on the commodity space including most mining services companies in the Australian small-cap universe.
View the February 2016 performance reports: