Since the turn of the year, the outlook for the resources sector has improved. Commodity prices have generally risen, or at least stabilised following their major falls of the previous couple of years. This has led to investors becoming increasingly optimistic regarding the prospects for the sector.
This is good news for Sirius Minerals (LSE: SXX), since it’s going to be reliant on funding from investors and lenders in order to get its potash mine in Yorkshire off the ground. Clearly, the project has huge long-term potential. Food production is set to be one of the major growth areas over the coming decades as the world’s population is expected to rise by around a third by 2050. And although modern farming techniques are becoming increasingly efficient, more effective fertiliser could produce higher yields and become invaluable.
Thus far, the potential for Sirius Minerals’ polyhalite fertiliser is strong. Crop studies have been generally positive and there appears to be significant demand. The question mark looks to be around the financing of the project. While raising £1bn-plus following a brighter period for commodity prices may be easier, risk-averse investors may wish to invest in companies that are already profitable given the high degree of uncertainty likely to continue in the commodity sector.
Long-term rewards
Also benefitting from rising commodity prices this year has been Rockhopper (LSE: RKH). The oil price has almost doubled from its February low of $28 per barrel and in the long run there could be more to come. Exploration spend has fallen in recent months as cutbacks have been made across the industry and this means that with demand likely to rise in future as the emerging world becomes increasingly oil-dependent, the oil price could rapidly rise.
This would be good news for Rockhopper and now that it has merged with Falkland Oil & Gas, it has a stronger asset base. This could yield high long-term returns for the company and with its latest update showing that it has $110m of cash on its balance sheet, as well as an increase in production from its Mediterranean assets, Rockhopper appears to be a sound buy for investors seeking small-cap resources plays.
Long road ahead
Meanwhile, shares in Amur Minerals (LSE: AMC) have disappointed in 2016, falling by around 48% year-to-date. That’s despite the company releasing positive news flow regarding its Kun-Manie prospect. In fact, today Amur Minerals said that it has completed almost half of the planned drilling for its 2016 Maly Kurumkon-Flangovy drill programme at the site. It expanded the pipe at its step-out drilling following the receipt of results from its first drill hole last month.
Clearly, Amur has a long way to go before it becomes a profitable business, but the Kun-Manie prospect has considerable potential. However, with investor sentiment being weak (Amur’s shares are down by a further 6% today) and a number of other resources stocks being cheap and highly profitable, there may be better options elsewhere.
