One of the best performing sectors within any industry this year has been gold mining companies. For example, shares in precious metals company Hochschild (LSE: HOCH) have risen by an incredible 130% since the turn of the year as the price of gold has surprised the majority of investors.
In fact, gold has recorded double-digit gains this year and while that may not sound so impressive, there were fears that 2016 could be a horrific year for the precious metal as rising US interest rates hurt demand for non-interest producing assets. However, with uncertainty surrounding the global economy pushing gold and other precious metals prices higher, Hochschild’s outlook has suddenly become a lot brighter.
Despite this, its shares still seem to offer a rather unappealing risk/reward ratio. For example, Hochschild may be forecast to return to profitability this year, but its recent share price rise appears to adequately price this in. It has a forward price-to-earnings (P/E) ratio of 44.8 and while its future profitability may rise at a brisk pace, there appear to be better options available elsewhere within the resources space.
Bright future… or not
Similarly, Sirius Minerals (LSE: SXX) could also have a very bright long-term future, but its risks seem to outweigh its potential rewards. Certainly, the potential to deliver one of the world’s biggest potash mines is present and the company’s recent definitive feasibility study provided a degree of confidence regarding its long-term profit potential.
Furthermore, the crop studies being undertaken and potential demand for the polyhalite fertiliser that Sirius Minerals aims to produce appear to offer further encouragement regarding the prospect of sizeable long-term profits.
However, with the resources sector being relatively depressed at the moment, the financing of such a major project could prove to be more difficult than previously thought. After all, a number of world-class assets are trading at low valuations and unlike Sirius Minerals, may be highly profitable even during a period of low commodity prices. As such, there seem to be better options available elsewhere within the resources space.
Too big a risk?
Meanwhile, European Metals Holdings (LSE: EMH) also has considerable long-term potential due to the prospect of rising demand for lithium in future years. With the world continually moving towards cleaner forms of energy, lithium power could have a bright future within a number of applications, including cars. Therefore, European Metals Holdings could benefit from an economic tailwind over the long run.
However, with European Metals Holdings having no revenue and being concentrated on one project in Europe (the Cinovec project), it appears to offer significant risks compared to a number of its peers. For example, other exploration stocks have a degree of geographic diversity and with highly profitable resources companies trading at discounts to book value, the appeal of companies such as European Metals Holdings may be somewhat limited among investors who remain generally risk-averse.
