One of the stories of 2015 has been the demise of the resources sector. Clearly, this has been an annus horibilis for the industry, with the prices of commodities tumbling and causing the valuations of companies operating within the resources sector to decline at a rapid rate.
Against this bleak backdrop, though, is opportunity. Realistically, things could get worse before they get better, but just as 2015 has been a terrible year for commodity stocks, 2016 could prove to be a year of comeback, or at least a move towards improved financial performance.
One stock which appears to be worth buying ahead of improved performance is Tullow Oil (LSE: TLW). In response to the oil crisis, Tullow made the decision to maximise its asset base and focus to a lesser extent on exploration spend. Certainly, it remains an oil exploration play, but it is evolving into a highly cash generative business which could be about to deliver a stunning rise in profitability.
Tullow is set to do this through ramping up production. Although this strategy is fairly obvious, Tullow’s share price does not appear to price in the full effects of its completion of the TEN development in Ghana. It is expected to deliver first oil in mid-2016, being 75% complete as at the release of the company’s November trading update, and it is due to contribute to a rise in Tullow’s earnings per share (EPS) from 1p in the current year to almost 10p next year.
With Tullow trading on a price to earnings growth (PEG) ratio of just 0.1, it appears to have tremendous upside as well as the potential to rapidly increase dividends as its cash flow obtains a major boost from additional production. As such, now appears to be a sound moment to buy for the long term.
Meanwhile, silver producer Hochschild (LSE: HOC) is set to remain a loss-making entity in the current year, with a pretax loss of £28m being forecast. Although this would represent an improvement on the pretax losses of £80m and £45m from the previous two years, investor sentiment in Hochschild is set to remain weak in the coming months as the market prices in the continued disappointing performance.
Looking ahead to next year, though, Hochschild is set to return to having a black bottom line, with a pretax profit of £3m being expected by the market. While this is positive and could lead to a stabilisation in the company’s share price after a fall of 23% in the last three months, other silver and gold producers are profitable and appear to offer better value than Hochschild at the present time. Therefore, while Hochschild is worth watching, it does not appear to be a buy.
Bucking the trend for resources companies this year, of course, is Sirius Minerals (LSE: SXX). Its shares have risen by 69% since the turn of the year and a key reason for this has been positive news flow surrounding the proposed potash mine in York. Although there were delays with the decision process, Sirius Minerals now has the required consents and can press ahead with the £1bn+ project.
In 2016, however, its shares may not deliver such strong performance. After all, there was doubt surrounding the planning process and this year’s rise not only reflects the positive surprise of achieving the required approvals, but also the potential for Sirius Minerals to become a major supplier of polyhalite fertiliser over the long term. In other words, the company’s current valuation may be rather generous given that challenges such as financing lie ahead.
So, while Sirius Minerals could prove to be a strong long-term buy for less risk-averse investors, 2016 may prove to be something of a comedown compared to a superb 2015.
