Valuations in the natural resources sector have taken a major hit this year and for long term investors there may be a number of bargains on offer. The difficulty, though, is identifying which stocks are cheap for a reason and which are underpriced given the company’s long term prospects. As such, the sector can be a potential minefield for investors who focus solely on how cheap a company’s shares are.
One stock which has bucked the trend in 2015, but remains very cheap, is Cape (LSE: CIU). It delivers industrial services to the energy and resources industries and, at least partly as a result of their weakness, is forecast to post a fall in its bottom line of 11% in the current year and a further drop of 1% next year. Although disappointing, investors appear to be much more positive about Cape than for a number of its peers, since the company’s shares have risen by 5% since the turn of the year.
Looking ahead, though, there could be further capital gains on offer in 2016, since Cape still trades on a price to earnings (P/E) ratio of only 9.5. This indicates that it has huge upward rerating potential. Furthermore, Cape currently yields 5.5% from a dividend which is covered by profit 1.9 times and is therefore not only stable, but has the scope to increase even if profit growth is disappointing.
Certainly, Cape’s near term prospects are rather downbeat, but with such a strong yield and a wide margin of safety, it appears to be well worth buying right now.
Similarly Petra Diamonds (LSE: PDL) is also very cheap at the present time. For example, it trades on a P/E ratio of just 10 after its shares have slumped by a whopping 70% since the turn of the year. And, while Petra Diamonds recorded a fall in net profit of 32% last year and is due to report a decline of 14% in its earnings this year, such a low rating indicates that there is a sufficiently wide margin of safety to merit investment.
In addition, Petra Diamonds also has a yield of 3.9% which, like that of Cape, is well-covered by profit at 2.6 times. As a result, even if share price growth is rather subdued over the medium term, the income potential of the stock remains relatively strong.
Also trading at an apparent discount to its intrinsic value is Sirius Minerals (LSE: SXX). It has a market capitalisation of only £413m despite having approval to build a mine at the location of the world’s largest and highest grade polyhalite deposit. And, with crop studies using the commodity showing positive results, it seems likely that demand for the fertiliser will be relatively strong in the coming years.
The problem, though, is that there is a long way to go until Sirius Minerals becomes a fully-fledged producer. Financing is likely to be a major obstacle at a time when many investors are rather lukewarm regarding the prospects for the global economy, and even less enthusiastic about the future of the mining sector.
So, while various NPV figures of above 50p per share have been discussed, there will inevitably be a number of challenges for the company to overcome in future years. Due to the strength of its asset base, however, less risk averse investors may see Sirius Minerals as a value play at the present time.
