3 distressed stocks with huge potential that I’m considering for my portfolio!

These three distressed stocks have performed badly in 2022, but that doesn’t mean they won’t recover. Here’s why I’m considering buying!

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I’m not often hunting for distressed stocks to add to my portfolio, but these three have caught my eye. Polymetal (LSE:POLY), Ferrexpo (LSE:FXPO) and Petropavlovsk (LSE:POG) have all seen their share prices hit after Russia invaded Ukraine and Western partners introduced sanctions on Moscow. These events have worried investors and raised concerns that these three mining firms may struggle to continue their operations. However, there’s also huge potential for share price growth here if these firms can continue operating and selling their products.

Polymetal

Polymetal shares sank in February and March. The UK-listed gold miner has highly profitable assets in Russia and Kazakhstan. However, the firm has highlighted concerns about access to funding after Russia and Russian banks were hit by sanctions. Despite this, the Anglo-Russian miner is operating close to 2021 levels. It’s also benefiting from higher prices for its gold and silver.

Polymetal will remain a top-10 global gold producer and top-five global silver producer if operations aren’t impacted. Production fell 6% in Q1 but the company is still forecast to produce 1.7m ounces of gold this year. That’s the same as 2020, and with higher prices, it could even be a more profitable year for Polymetal.

I owned Polymetal stock before the war and recently doubled my holding as I think there’s a huge growth opportunity here. Based on last year’s earnings, it currently has a price-to-earnings (P/E) ratio of just 1.5. Despite this, I accept that there’s a lot of risk here including the possibility that Polymetal could be sanctioned if the war escalates further in Ukraine.

Ferrexpo

On the P/E metric, Ferrexpo looks even cheaper. The miner has a P/E ratio of just 1.2 after its share price tanked this year. The stock is down 69% over 12 months despite despite iron ore – Ferrexpo’s main product – increasing in value during 2022. Some 70% of Ferrexpo’s mines are in war-torn Ukraine and the firm is seemingly not operating at full capacity.

Ferrexpo recently announced that Q1 iron ore pellet production came to 2.7m tonnes. The figure is in line with the same period in 2021, but 11% below the previous quarter due to “operational and logistical constraints“. However, according to Liberum, the miner’s production levels suggested that it was operating at 70% of capacity during March. 

I’m looking to add Ferrexpo to my portfolio but the ongoing nature of the war presents a huge risk.

Petropavlovsk

Petropavlovsk is a London-based gold mining company with operations in Russia. However, I foresee more challenges for it than for Polymetal. The company is in a catch-22 situation with sanctioned Gazprombank demanding immediate repayment of approximately $201m due under its committed term facility agreement. Despite production increasing, the miner is also struggling to sell its gold, primarily because its main customer, Gazprombank, was sanctioned. These factors, coupled with $300m owed to Western investors, are making it increasingly likely that Petropavlovsk will default on its debts. I’m keeping Petropavlovsk on my watchlist because its trading at a fraction of its pre-war price, but for now, I’m giving this one a miss.

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.

James Fox owns shares in Polymetal. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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