20% Gains Are On The Cards For BHP Billiton plc, Petrofac Limited And Centamin PLC

With all the talk about disastrous share price performance in the resources sector, it may be somewhat surprising to learn that a number of its incumbents have posted strong gains since the turn of the year.

For example, gold producer Centamin (LSE: CEY) is up by 23% this year and its share price appears to be moving inversely to the wider index. That’s because investors are becoming increasingly bullish on the prospects for gold, with it being seen as a relatively safe asset at a time when there are real fears surrounding the prospects for the global economy. And with Centamin rapidly increasing its output of gold, its bottom line is forecast to rise over the medium term.

With Centamin trading on a price-to-earnings growth (PEG) ratio of just 0.6, even though it has risen sharply in recent weeks, it appears to be an excellent long-term buy and is very capable of doubling its return thus far in 2016. That’s especially the case since there’s a real lack of mining stocks that offer near-term earnings growth potential, which means that Centamin offers a degree of scarcity value.

Time to buy?

Of course, not all resources companies have risen sharply this year. For example, Petrofac (LSE: PFC) has fallen by 15%. It’s facing major cutbacks in spending and investment across the resources industry and is being forced to manage costs more effectively and generate greater efficiencies in response.

However, the company continues to have major appeal for income, value and growth investors alike. For example, it currently offers a yield of 5.9% from a dividend that’s due to be covered 2.3 times by a bottom line expected to rise by 174% in the current year. This puts Petrofac on a forward price-to-earnings (P/E) ratio of only 7.3, which despite its highly uncertain medium-term outlook, indicates huge upward rerating potential. As such, now could be an opportune moment to buy a slice of it ahead of 20% gains.

Gathering strength

Meanwhile, shares in diversified resources play BHP Billiton (LSE: BLT) have tumbled by 17% since the turn of the year and it now seems likely that a dividend cut will be implemented by the company. This would follow Rio Tinto’s decision to move away from its progressive dividend policy this week. And with BHP’s shares trading on a yield of 12.2%, it appears as though the market has already priced-in a huge dividend cut.

Although a 20% gain in BHP’s share price may seem unlikely, the company has the potential to emerge from the current commodity crisis in a much stronger position relative to its peers. That’s because it has a strong balance sheet and resilient cash flow that should enable it to make acquisitions should it so wish. And with the scope for cost-cutting and efficiencies following its split into core and non-core, its profitability could rise over the medium term. Therefore, with BHP trading on a price-to-book (P/B) ratio of 0.9, a 20% rise is on the cards in the medium-to-long term.

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Peter Stephens owns shares of BHP Billiton, Centamin, Petrofac, and Rio Tinto. The Motley Fool UK owns shares of and has recommended Petrofac. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.