Would Glencore plc, Fresnillo plc and Highland Gold Mining Ltd survive a commodity price collapse?

Does the risk of further challenges in the resources sector mean you should avoid these three stocks? Glencore plc (LON: GLEN), Fresnillo plc (LON: FRES) and Highland Gold Mining Ltd (LON: HGM).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While the outlook for commodity prices is now much brighter than it was just a few months ago, there’s still the danger of further challenges. After all, commodities are dependent on demand and supply. Both of these factors can change rapidly over a short space of time and with very little warning. As such, having a margin of safety appears to be a prerequisite when buying resource-focused stocks.

For example, the world’s largest silver miner Fresnillo (LSE: FRES) trades on a price-to-earnings growth (PEG) ratio of just 0.6, which indicates that its shares are undervalued at the current time. That’s based on very strong growth forecasts in the next financial year, with Fresnillo expected to increase its bottom line by as much as 66% due in part to a rising silver price.

Certainly, there’s the potential for the silver price to fall as it did in recent years prior to the recent pickup. However, Fresnillo was able to remain profitable even when silver hit its low points following a 70% fall between 2011 and 2015. This shows that the company’s cost base is relatively low and that while a fall in the silver price can’t be ruled out, Fresnillo is likely to survive and emerge from it in good shape.

Tough times

While Fresnillo has performed well as a business in recent years, Glencore (LSE: GLEN) has endured a rather more difficult period. Like most of its peers, Glencore has been hurt by falling commodity prices and this has caused investors to question the company’s financial standing. Specifically, the market has become concerned about Glencore’s debt levels and there was a general feeling among investors that the company was riskier than a number of its similarly-sized sector peers.

In response, Glencore is implementing a strategy that’s eeing asset disposals being made, efficiencies being generated and the company’s balance sheet risk reduced. Although this is an ongoing process that will take time to complete, investors appear to be upbeat about the company’s prospects to become more financially sound and better able to cope with a prolonged and severe downturn in commodity prices.

With Glencore trading on a PEG ratio of just 0.6, it appears to offer a sufficiently wide margin of safety to merit investment at the present time. It has relatively high risks but considerable potential rewards.

Margin of safety

Meanwhile, Highland Gold (LSE: HGM) has benefitted from the rising gold price in 2016, with the company’s shares surging upwards by 71% since the turn of the year. However, with US interest rate rises on the horizon, the appeal of gold could wane even if uncertainty across global markets makes its status as a store of wealth more appealing to nervous investors.

In such a scenario Highland Gold seems to be relatively well-prepared. It has a debt to equity ratio of 34%, which indicates that its balance sheet is modestly leveraged. Furthermore, it has strong cash flow, with free cash flow standing at $65m in the 2015 financial year and just under $39m in the 2014 financial year. And with Highland Gold having a PEG ratio of just 0.2, it seems to have a sufficiently wide margin of safety to merit investment from less risk-averse investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Caucasian man making doubtful face at camera
Investing Articles

When will Shein hit the UK stock market and should I invest?

With Shein looking likely to list on the London stock market in 2024, this writer weighs up the case for…

Read more »

Investing Articles

Start supercharging passive income with REITs!

Are REITs the ultimate investment for boosting income generated from a portfolio? Zaven Boyrazian explores some of the most lucrative…

Read more »

Investing Articles

Should I buy more Rolls-Royce shares near 500p?

This investor is wondering whether to buy more Rolls-Royce shares this summer or to just stick with those he already…

Read more »

Investing Articles

After its big fall, is the National Grid share price dirt cheap now?

The National Grid share price fell sharply in reponse to new rights issue plans. But is it an even better…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Starting in June, I’d invest £1,000 a month to aim for a £102,000 second income in retirement

This author highlights a less well-known FTSE 100 stock that could help his portfolio generate a very big second income…

Read more »

Investing Articles

Down 47% in 5 years, is the IAG share price due a bounce?

Many companies in the travel sector have seen fierce rallies since 2020. But with the IAG share price still down…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Despite its drop, I reckon this is one of the best FTSE 100 stocks to buy and hold!

The FTSE 100 has been climbing in 2024 but this favourite of our writer's has been falling. Despite this, she’s…

Read more »

Investing Articles

AI stocks vs EV shares; which is the best sector for me to invest in?

Jon Smith considers the recent rally in AI stocks and weighs up whether to allocate more money there versus EV…

Read more »