3 reasons why we avoid single commodity and single mine resource stocks

Given the market’s 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, their earnings are usually heavily reliant on commodity prices and currency movements. Many merely own a resource undergoing feasibility, yet to be mined or even proven. And third, two drivers of share price performance for small mining companies are 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 drivers cannot be forecast by our analysts due to the 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. Overall, we remain bearish on the commodity space including most mining services companies in the Australian small-cap universe. (VIEW LINK)