Undoubtedly, the slump in the resources sector was the story of 2015 with investors suffering greatly from falling commodity prices and declining profitability. Looking ahead, further challenges could be on the horizon and while the outlook for the global economy continues to improve, commodity prices could come under further pressure.
For example, the price of gold may disappoint in 2016 due to the impact of rising interest rates. Historically, increasing US interest rates have been negatively correlated with the price of gold. That’s largely because non-interest bearing assets (such as gold) hold less appeal when interest rates are on the up. As such, and while 2015 saw the price of gold reach a five-year low, the precious metal could struggle to record positive gains this year.
Shrewd move?
Despite this, buying a slice of Randgold Resources (LSE: RRS) could prove to be a shrewd move. That’s because, with the company’s bottom line due to rise by 21% in the current financial year, Randgold trades on a price-to-earnings growth (PEG) ratio of only 1.3.
Furthermore, Randgold is expected to increase dividends per share by 16% in 2016. This signals that the company’s management has confidence in its long-term outlook, which could act as a positive catalyst on its valuation. And while Randgold offers a yield of just 1% at the present time, its payout ratio of only 27% indicates that brisk growth in shareholder payouts could be on the cards.
Similarly, oil support services company Lamprell (LSE: LAM) also appears to be very cheap at the present time. It has a price-to-earnings (P/E) ratio of 8.6 and even taking into account the current year’s forecast fall in net profit of 2%, Lamprell still offers significant scope for an upward rerating.
Of course, the falling oil price is causing many of Lamprell’s customers to defer or cancel capital expenditure. This trend is likely to continue since even a period of stabilisation or a rise in the price of oil is unlikely to cause a return to previous levels of exploration and development spend. That said, Lamprell recently reported that its strategy to improve efficiencies is on track. And with a new CEO set to take charge this year, investor sentiment in the stock could get a boost even if the oil and gas industry continues to struggle.
Convince me!
Meanwhile, shares in Lonmin (LSE: LMI) continue to disappoint and are down by 7% already in 2016 after their fall of 99.5% in 2015. Looking ahead, Lonmin’s near-term future appears to be relatively secure after its recent $400m rights issue, although the outlook for the wider platinum producers sector remains highly uncertain.
Clearly, Lonmin is very cheap at the present time. But investors appear to be highly unconvinced about its new strategy, as evidenced by a 71% take-up of its rights issue. As such, it may take time for investor sentiment to improve. And while Lonmin’s plan to cut costs and reduce capital expenditure in the face of low commodity prices is a sound one, the likes of Randgold and Lamprell appear to offer a superior risk/reward ratio over the long run.
