The resources sector is akin to a yo-yo at the present day. One day, there is a sea of red and the financial stability of sector constituents is being tested. The next day there is a degree of optimism among investors regarding valuations and growth prospects.
Clearly, buying resources companies at the moment is not for the faint-hearted. And, buying now means that there is a very real possibility of paper losses being experienced in the coming months, since finding the bottom of the current market is impossible.
However, buying certain resources companies right now could be a shrewd move a few years down the line. Take, for example, the world’s largest silver producer Fresnillo (LSE: FRES). It has remained profitable in each of the last five years despite a collapse in the price of silver and, looking ahead to the next two years, profitability is set to continue.
In fact, Fresnillo’s bottom line is expected to be almost five times higher in 2016 than it was in 2014. This incredible rise in earnings, though, is not being priced in since Fresnillo’s share price has fallen by 17% in the last year and shown little sign of life in recent weeks or months. Therefore, now could be a great time to be contrarian and buy when Fresnillo trades on a price to earnings growth (PEG) ratio of just 0.2, since it remains financially sound and offers size, scale and relative stability – as shown by its track record of profitability.
Sector peer Hochschild Mining (LSE: HOCH), though, is a rather different prospect. Also a silver miner, its earnings have been far less stable than those of Fresnillo in recent years. Hochschild’s bottom line has slipped into the red in each of the last two years and it is expected to remain so in the current year. Clearly, this is unlikely to positively catalyse investor sentiment in the short run.
However, the scale of losses is due to fall for the second year in succession and, looking ahead to next year, Hochschild is set to return to profitability. And, with its shares trading on a price to book value (P/B) ratio of just 0.46, the company’s shares are clearly cheap. The problem, though, is that they could become cheaper and, as such, it may be worth waiting for additional updates regarding the company’s performance before buying a slice.
Meanwhile, Xcite Energy (LSE: XEL) is some way off generating any revenue, never mind a profit. That is, of course, because it is an oil exploration company and, while its Bentley field in the North Sea is now less economically appealing due to a lower oil price, the reality is that by the time it begins production the oil price could be much, much higher.
In the meantime, spending on infrastructure by Xcite is likely to be cheaper as prices across the oil industry have fallen. So, if oil does recover in the coming years, Xcite may have enjoyed lower costs in the intervening period and could still benefit from a higher oil price.
Clearly, Xcite is a rather speculative company and, while it could prove to be an excellent performer in the long run, it may be prudent to await further positive news flow regarding its future prospects and financial outlook before buying a slice of it.
