The current commodity crisis is proving to be exceptionally difficult for investors to call. On the one hand, there seems to be no floor in sight for the prices of oil, iron ore and various other commodities and, looking ahead, an uncertain outlook for China is likely to exert downward pressure on the sector in the coming days, weeks and months.
However, on the other hand there is a tremendous opportunity to buy stocks at a time when there truly is ‘blood running in the streets’ which, according to John Rockefeller, is the perfect time to buy. And, for long term investors, what does it matter if commodity prices halve in the coming months? As long as the companies survive and commodity prices eventually quadruple, investors could still be making the right move by buying at the present time.
Take, for example, Glencore (LSE: GLEN), which has recently undertaken a $10bn debt reduction plan in order to strengthen its balance sheet and convince the market that it is a sustainable business. The market, though, does not seem to back the plan, with it today being reported that if commodity prices fall further, Glencore may not be able to maintain its current credit rating. Under that scenario, its cost of debt may rise and squeeze profitability even further, which would clearly be bad news for both its financial and share price outlook.
Of course, Glencore is a high quality business which is highly likely to overcome its present difficulties and survive the commodity crisis. The challenge, though, is that further fundraisings cannot be ruled out and, with the company’s shares falling below 100p earlier this week for the first time ever, there is a realistic threat that investing now will lead to paper losses in the short run. As such, it may be prudent to await further developments on Glencore’s financial outlook – especially since its shares are down by over 25% in the last week.
Meanwhile, gold producer Centamin (LSE: CEY) and copper miner Antofagasta (LSE: ANTO) are also enduring challenging periods. The price of gold hit a five-year low earlier this year, while the price of copper is expected to come under further pressure due to a global supply/demand imbalance.
For long term investors, though, both of these stocks present tremendous investment opportunities. In the case of Centamin, it is pushing ahead with an increase in production over the next few years and this means that its bottom line has a good chance of rising at a brisk pace. In fact, it is forecast to increase by 19% next year and, if the outlook for the global economy remains highly uncertain, the price of gold may rise as investors seek relative save havens. And, with Centamin trading on a price to book value (P/B) ratio of just 0.87, there is considerable upward rerating potential on offer.
Similarly, Antofagasta has a very appealing asset base and is due to increase its earnings by as much as 73% next year. Certainly, it will still be some way behind its performance of a few years ago, when its pretax profit was above $3bn, but a forecast pretax profit of $1.3bn next year would still represent a good performance given the challenging trading conditions. And, with Antofagasta trading on a price to earnings growth (PEG) ratio of just 0.2, there seems to be plenty of scope for capital gains in the long run.
