How to Sift Winning Resource Stocks from the Washouts

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Last night should have been a quiet one at the Cowie residence. But my poor wife had to listen as I spent two hours on the phone to Africa. I recently returned from a fact-finding mission there, and was now catching up with one of my on-the-ground contacts: the Managing Director of an ASX-listed resource company with an incredible new mining operation in the works.

This company I visited in Africa a few months back really gets my pulse going: It’s sitting on a commodity that’s been unloved for most of the year… but is set to roar back to life in 2011. But it’s the vastness of this resource that took my breath away. Driving across it is the same distance as going from Sydney to Adelaide.

If you’re interested in Australian resource stocks, you need to keep an open mind and look outside our borders too. Because we’re so proficient at getting valuable stuff out of the ground, you tend to find talented Aussies wherever the resources are the world over.

This Aussie/Africa play is probably the most exciting stock I’ve researched this year. I don’t get on a plane and fly to the other side of the world for every stock I research.

(I’ll show you exactly what I found – and what the Managing Director told me last night – later in the week.)

If you want to find good resource stocks in this climate, you need to identify a commodity where demand is likely to continue outstripping supply for years to come. I know – I’m stating the obvious. But you’d be surprised at how many listed companies out there are sitting on the WRONG commodity for the next decade.

You then need to make sure your company can produce this commodity cheaply. That’s why I love the Africa play I’ll introduce you to later this week.

According to the World Mine Cost Data Exchange, the average industry cost of producing the commodity this company is sitting on was $1.68/lb in 2009.

The company I’m looking at can produce it for $1.23/lb.

You’ve also got to look at the QUALITY of the resource a company is sitting on. It doesn’t matter if the tenement size is vast and production costs low if the ore grade is rubbish. (The ore grades of my Aussie/African find are DOUBLE the industry average…)

Finally you need to focus on who is running the show. Don’t just look them up on the web. Email them. Call them. Get on a plane and meet them! It takes a certain talent to turn a hole in the ground into a 10 to 15-year money-spinner.

By focussing on the simple but crucial things, I’ve managed to make my readers good money in a very dark market.

This is what our portfolio looks like at the moment. I’ve blocked out the name, code and current price so not to protect the readers and not give anything away for free! The average time we have held any one stock is just 7 months.

Diggers and Drillers stocks making gains close to 40%

Diggers and Drillers stocks making gains close to 40%

Source: D&D records

Right now, I can see even greater opportunities ahead.

Certain commodities such as copper, tin, gold, platinum, and coal are looking really good. Gold is at an all time nominal high yet again, tin is not far off, copper is on the march once more, and platinum is not far behind.

I just got back from the Diggers and Dealers conference in downtown Kalgoorlie. This is Australia’s biggest mining conference, and dozens of companies presented there. I’ve got a stack of new ideas and the overall vibe is more energised than I’ve ever experienced.

The sense is that big things are around the corner in 2011.

So if you’re going to be in the market, keep your eyes out the RIGHT KIND of resource stocks… with cheap production costs… trading at reasonable prices. And later this week, I’ll tell you more about the Aussie/Africa play which I predict could be one our top performers in 2011.

Dr Alex Cowie,
Editor, Diggers and Drillers
for The Daily Reckoning Australia

Dr. Alex Cowie
Dr. Alex Cowie is the editor of Diggers and Drillers, Australia's premier resource stock tip sheet.
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