For many investors, the resources sector is something of a ‘no-go’ area at the present time. That’s understandable, since the price falls of a variety of commodities have been savage and, just when you think things cannot get any worse for the resources sector, they seem to do just that. As a result, investing in the space seems to be either very foolhardy, or a very brave thing to do.
However, buying shares in resources companies could also be a very logical thing to do at the present time. That’s because, during a number of crises for specific sectors there have been excellent buying opportunities. For example, the banking crisis in recent years presented tremendous opportunity to buy struggling banks at knock-down prices, with them mostly having recovered exceptionally well. And, for long term investors, the same could become true for oil and mining companies in the next handful of years.
Therefore, stocks such as LGO Energy (LSE: LGO) hold considerable appeal. It provided an update on progress at its key Goudron field in Trinidad today, with the company commencing drilling on the seventh and final well as the project. And, encouragingly for the company’s investors, LGO Energy has stated that its drilling programme continues to make excellent progress, with significant data being collected which should aid the long term management of the field. Furthermore, the prior six wells that have already been drilled have all found hydrocarbons and, as a result, LGO will provide production guidance moving forward.
Clearly, this bodes well for LGO Energy and, while a lower oil price is likely to squeeze its margins, it remains a relatively low cost producer that should be able to withstand a period of depressed oil prices. And, with it trading on a price to book (P/B) ratio of just over 2, now seems to be an opportune moment to buy a slice of the business.
Similarly, mining companies such as Anglo American (LSE: AAL) and Randgold Resources (LSE: RRS) also offer huge potential. In the case of Anglo American, it offers one of the highest yields in the FTSE 100, with it currently standing at a whopping 7%. Clearly, there may be a degree of pricing in of a dividend cut by the market but, on the face of it, Anglo American’s current shareholder payouts appear to be very sustainable, with dividends expected to be covered 1.3 times by profit next year. And, with the company’s shares trading on a P/B ratio of just 0.5, there is a huge margin of safety on offer, too.
Meanwhile, even the price of gold has declined in recent months, with it recently hitting a five year low. This is somewhat surprising given the concerns surrounding the Eurozone and China, with gold prices tending to move in the opposite direction to sentiment among investors. Still, gold miner, Randgold, has remained profitable in recent years and, looking ahead, is forecast to increase its earnings by 26% next year. This puts the company on a price to earnings growth (PEG) ratio of just 0.8, which indicates that its shares could deliver strong gains over the medium to long term.
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Peter Stephens owns shares of Anglo American. 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.