With US interest rates rising by 25 basis points last week, the price of gold has been thrust back into the headlines. That’s because it has historically been negatively correlated to interest rates, which means that its outlook in a world where monetary policy is being tightened is relatively less appealing.
However, this doesn’t mean that gold mining companies should be avoided. Certainly, the price of gold may disappoint in 2016, but Centamin (LSE: CEY) continues to offer considerable upside. That’s mainly because it’s in the process of ramping up production so that it reaches 500,000 ounces per annum by 2017. This has the potential to rapidly increase Centamin’s profitability and, while the extent of this is dependent on the price of gold, a low cost base and a highly efficient operation mean that Centamin’s bottom line is forecast to rise by 19% next year.
This high rate of growth combined with a low price-to-earnings (P/E) ratio of 13.6 equates to a price-to-earnings growth (PEG) ratio of only 0.6. As a result, Centamin’s share price could soar in 2016. Its forward dividend yield of 3.2% holds considerable appeal due to it being covered 2.8 times by profit and therefore being relatively sustainable.
Hunting for growth
Also having an appealing valuation is Hunting (LSE: HTG). The energy services company trades on a PEG ratio of just 0.6 and with its bottom line due to rise by 54% in 2016, investor sentiment could be given a major boost.
Clearly, the deferral and reduction in capital expenditure across the resources industry is hurting Hunting’s bottom line. And with the potential for further commodity price falls, there’s a reasonable chance that the company’s growth prospects could be downgraded. In fact, Hunting recently reported that trading across its divisions remains subdued. As such, its financial performance in the current year is set to disappoint.
Despite this, Hunting still has a strong balance sheet and with a reduction in staff numbers of 28% in the last year, its costs have fallen by around $50m per annum. This means that its long-term future should be relatively upbeat. With such a wide margin of safety on offer, its shares appear to be worth buying now for improved performance in 2016 and beyond.
Transformation strategy
Meanwhile, buying Rio Tinto (LSE: RIO) right now also seems to be a sound move with the company having the potential to emerge from the current crisis in a stronger position relative to its peers. That’s because its strategy of increasing production while also reducing its costs is likely to put greater pressure on higher-cost producers, thereby potentially increasing Rio Tinto’s dominant position within the iron ore market.
Alongside this, Rio Tinto is refocusing its capital spending as it attempts to diversify away from its dependence on iron ore. Although this will take time to achieve, it’s seeking to adapt to an iron ore price that has hit a 10-year low this year. And with the price of lithium rising rapidly for example, Rio Tinto is considering mining the commodity.
With a strong balance sheet, excellent cash flow and a highly disciplined cost approach, Rio Tinto appears to be one of the most appealing plays within the resources sector. While its short-term performance may disappoint, it appears to be a sound purchase for less risk-averse, long-term investors.
