With the resources sector coming under severe pressure in the last couple of years, the potential for superb capital gains over the medium to long term is significant. Clearly, in the short run things could get worse before they get better and the prices of a number of resources companies may fall in the coming months. However, for investors taking a longer term view, there are undoubtedly a number of bargains on offer, and investors may benefit from being greedy while others are somewhat fearful.
One resources company with huge long term potential is Amur Minerals (LSE: AMC). It released an upbeat set of interim results today which show that the company is making encouraging financial progress. For example, it swung to a pretax profit of $2.9m versus a loss of $5.3m from the same period last year. The key reasons for the change in the company’s profitability was a fair value movement on the Lanstead financing agreement of $1.2m, while financing income of $2.8m also helped it to overcome a $1.1m operating loss during the period.
Of course, Amur Minerals remains an explorer rather than producer at the moment, so operating losses are to be expected. Pleasingly, Amur has no debt and a cash balance of $8.3m. Clearly, funds will need to be raised to turn the Kun-Manie prospect into a fully functioning mine, but with the quality of its asset base and the potential it holds, it would not be a major surprise if Amur’s share price doubled in the coming years. Risks are substantial, but with it having risen by 170% in the last year, it could prove to be a star performer.
Similarly, Nostrum (LSE: NOG) has the potential to double in value over the long run. That’s because it is forecast to increase its bottom line by over three times in 2016, which puts it on a price to earnings growth (PEG) ratio of just 0.1. While its guidance could be downgraded if the oil price remains weak, Nostrum appears to have a very wide margin of safety which should provide a degree of confidence to its investors and also act as a support should its outlook deteriorate.
Clearly, Nostrum’s fall in value of 40% in the last year is disappointing, but the market does not yet appear to have factored in its prospective improved level of performance. As such, and while its shares may not have the same scope for capital gains as a smaller exploration play such as Amur, on a risk/reward basis they seem to have a better balance between growth potential and stability.
Meanwhile, Amerisur Resources (LSE: AMER) released disappointing results recently which showed just how much it is struggling with the lower oil price. It swung from a pretax profit of $50m in the first half of last year to a $5m loss in the first half of the current year, with an average price of $49 per barrel of oil hurting its revenue. In addition, a fall in production also affected its top and bottom lines.
Looking ahead, Amerisur seems to offer significant potential. It is aiming to increase production in the current year and, crucially, to reduce operating costs per barrel to $16 from $27. This could improve profitability and, with its shares trading on a forward price to earnings (P/E) ratio of 9.2, it appears to be worth buying right now.
However, in terms of which stock could double first, Nostrum’s stability and growth potential mark it out as the most logical option, while Amur’s bright long term future mean that it may be the most likely to double in value first.
