Will Glencore PLC And Fresnillo Plc Ever Recover?

In the last three years, the mining sector has been in crisis. Commodity prices have plummeted, profitability has declined and share prices have recorded savage falls. For most investors, now does not appear to be a good time to invest in the sector since there is a good chance that further pain lies ahead. However, for less risk averse investors who are able to focus on the long term, the present time could present an opportunity to buy heavily discounted assets.

For example, shares in the world’s largest silver producer Fresnillo (LSE: FRES) have fallen by 63% in the last three years. The main reason for that is a declining silver price which has severely hurt the profitability of the wider sector during the period. However, while many of Fresnillo’s peers have sunk into loss-making territory in that time, it has remained firmly in the black and, looking ahead, could be about to mount a serious comeback.

In fact, Fresnillo’s earnings are forecast to rise by 155% in the current year, followed by further growth of 85% next year. And, while the market is gradually starting to factor in the company’s expected improved profitability, Fresnillo’s shares remain deeply discounted. For example, they trade on a price to earnings growth (PEG) ratio of only 0.4, which indicates that they could continue the climb which has seen them rise by 20% in the last three months.

Looking further ahead, Fresnillo may struggle to reach its all-time high of 2000p over the medium term, simply because it would require its share price to almost treble. However, with a dominant position in the silver market and improving profitability, it appears to be a sound, albeit volatile, buy at the present time.

Meanwhile, Glencore (LSE: GLEN) has posted a share price fall of 73% in the last three years and, with investor sentiment being weak, further falls could be on the cards in the near term. For example, Glencore’s share price has dropped by 35% in the last three months and many investors are concerned about the company’s balance sheet. Even a recent fundraising does not seem to have calmed the market’s worries regarding Glencore’s debt level and, with interest rate rises seemingly just around the corner, pressure on Glencore’s profitability could increase.

Furthermore, Glencore is forecast to record a fall in earnings of 57% in the current year and, as such, investor sentiment could be negatively affected by such a disappointing result. However, looking to next year, Glencore is expected to post a rise in earnings of 26% which puts it on a PEG ratio of just 0.6. This indicates that over the medium term its share price performance could stabilise and then improve if the company is able to deliver a sustained period of improved financial performance.

Of course, commodity prices are a known unknown and, as a result, forecasting Glencore’s financial performance is challenging. And, while a return to its IPO price of over 500p may not be on the cards, its low valuation, diverse operations and the quality of its asset base indicate that its long term future may be relatively prosperous. For now, though, prudent investors may wish to wait for the rout on Glencore’s shares to end before buying a slice of the business.

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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.