The resources sector is a difficult place in which to invest at the present time. Global demand for commodities is generally falling and, perhaps more worrying for investors, is that there is little sign of a significant improvement around the corner. After all, a major driver of demand for commodities such as oil in previous years has been China, with it assuming an even more important role in this regard following the global financial crisis. Therefore, with its economy struggling to maintain past growth rates, lower commodity prices seem almost inevitable.
However, history tells us that during such uncertain periods, precious metals such as gold tend to outperform other assets. That’s because they offer a store of value so that, even if there is financial meltdown (which, at the moment, does not appear to be on the cards), wealth should at least be preserved. Therefore, and even though the gold price hit a five-year low earlier this year, gold miners such as Centamin (LSE: CEY) and Fresnillo (LSE: FRES) appear to be sound buys, with both companies having exposure to gold mining.
Furthermore, the two stocks trade on supremely low valuations so that even if their financial performance does disappoint in the short run, they offer a wide margin of safety which limits their potential downside. For example, Fresnillo trades on a price to earnings growth (PEG) ratio of just 0.3 as a result of its earnings being forecast to rise from around 4.8p last year on a per share basis to almost 23p in 2016. That’s an increase of 4.8 times in just two years and, with much of the resources sector set to report declines in profit during the same time period, Fresnillo could be the recipient of improving investor sentiment.
Likewise, Centamin trades on a price to earnings (P/E) ratio of just 12 and, with its bottom line forecast to rise by 16% next year, it appears to have significant upward rerating potential. Unlike Fresnillo, which is primarily a silver producer, Centamin is focused on gold mining and, as a result, a combination of the two companies could prove to be a sound move for long term investors.
Meanwhile, the oil sector may seem like a less appealing space to invest and, realistically, it would be of little surprise for the oil price to fall further in the short term. However, LGO Energy (LSE: LGO) could be a relatively strong performer, since its drilling programme has the potential to improve investor sentiment over the medium term. And, with its finances being sound and the company benefitting from a lower cost curve than many of its rivals, it could outperform many of its sector peers moving forward.
Unlike oil, demand for lithium is on the increase and, with the world gradually moving towards the use of cleaner, less environmentally harmful fuels, investing in a lithium producer such as Rare Earth Minerals (LSE: REM) seems to make sense. Furthermore, the company has recently signed a deal to supply electric car manufacturer, Tesla, with lithium from its mine in Mexico and, while there is still some way to go before the project is operational (notably, financing will be required) shares in Rare Earth Minerals are up by almost 20% in the last week. Following this, the company has topped up its stake in partner, Bacanora Minerals, and has stepped up its drilling programme.
Clearly, news flow has been very positive for Rare Earth Minerals of late but, with a pre-feasibility study due out next year and the economic benefit of the Tesla deal still being somewhat unclear, it may be prudent to watch, rather than buy, a slice of Rare Earth Minerals at the present time.
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Peter Stephens owns shares of Centamin. 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.