With the resources sector having made a major comeback in recent weeks, many investors may be feeling as though they’ve missed out. While that’s true on the one hand, with commodity price rises pushing the valuations of a large number of resources stocks higher, there could still be good value for money on offer across the industry.
For example, Premier Oil (LSE: PMO) has recorded a share price rise of 82% in the last month as the price of oil has moved higher. Clearly, a higher oil price is good news for oil producers and could mean increasing profitability further down the line.
However, Premier Oil is still a relatively risky buy and is forecast to remain a lossmaking entity in each of the next two years. Certainly, losses are expected to narrow to almost breakeven in 2017, but with a significant debt pile and an uncertain outlook, Premier Oil is likely to remain volatile moving forward. And with there being the potential for a decline in oil prices in the near term, recent gains could easily be eroded.
Despite this, Premier Oil may still be of interest to less risk-averse investors. Its strategy to reduce costs and take advantage of lower asset prices through M&A activity seems to be a sound one, while its shares continue to trade at a discount-to-net asset value despite their recent gains. In fact, they have a price-to-book (P/B) ratio of just 0.55 and this indicates that long-term gains could be impressive.
All that glisters
Also rising rapidly this year have been shares in gold and silver producer Hochschild (LSE: HOCH). It’s benefitting from rising prices for both commodities, with increased uncertainty surrounding the global economy causing investors to increase their demand for less risky assets, such as gold. And while further rises in precious metals could lie ahead, Hochschild’s share price could easily be hurt by disappointment in this space in the near term.
Still, Hochschild may be of interest to less risk-averse investors. That’s because it’s expected to return to profitability in the current year and then grow its bottom line in 2017. This improved financial performance could act as a positive catalyst on investor sentiment and while future gains may not match the share price rise of 85% since the turn of the year, it doesn’t appear to be too late to buy Hochschild.
Risks now, rewards later?
Meanwhile, shares in diversified resources company Vedanta (LSE: VED) have also performed well in recent weeks. In fact, they’ve risen by 30% since the turn of the year and further price rises could lie ahead as the company continues to implement a revised strategy that’s set to reduce costs and create a leaner and more efficient business.
As with Hochschild and Premier Oil, Vedanta is highly reliant on the price of commodities in future. Furthermore, it has a sizeable debt pile and is therefore at the riskier end of the investment spectrum. But with Vedanta having a P/B ratio of 0.1, it could still offer significant upside over the medium-to-long term.
