The prospect of major fallers in the resources industry returning to their all-time highs may be difficult to conceive at the present time. After all, many of their valuations have fallen so heavily that they trade at fractions of their previous prices. As such, it would most likely take a major resurgence in commodity prices to facilitate such a huge growth period in valuations.
Of course, this is possible. Supply could tail off as profits come under increasing pressure. Likewise, demand has the potential to rise over the medium-to-long term as the industrialisation of the developing world continues and energy needs rise. And with valuations across the resources sector being low, now could be a good time to buy for the long term.
Think long term
For example, Anglo American (LSE: AAL) trades on a forward price-to-earnings (P/E) ratio of 10.4, which indicates that there’s upward rerating potential. Certainly, there’s the prospect of further declines in profit over the medium term, but with the company also having a price-to-book value (P/B) ratio of 0.3, it appears to be relatively attractively priced given its turnaround potential.
On this front, Anglo American is rationalising its business and reducing its asset base through disposals. This has the potential to improve its efficiencies and make it more competitive versus its peers. Although the prospects for the wide range of commodities that Anglo American mines are rather downbeat, Anglo American remains a well-diversified business that could post strong gains in the coming years. While a share price rise of 10 times to reach its 2008 high of 3,540p seems unlikely, it could still prove to be a worthwhile, albeit risky, long-term buy.
Potential gains
Also offering good value for money at the present time is copper miner Antofagasta (LSE: ANTO). Like Anglo American it has focused on selling off non-core assets, with Antofagasta’s water services company being disposed of. This should enable it to focus on its core copper activities and generate further efficiencies to boost its profitability over the medium-to-long term.
With Antofagasta forecast to record a rise in earnings of 55% in the current year, its price-to-earnings growth (PEG) ratio of 0.6 indicates considerable upside. Although a near-term rise to the company’s all-time high of 1,603p from early 2011 seems improbable in the medium term, a rising copper price plus further cost reductions could lead to stunning gains for the company’s shareholders.
Uncertainty ahead
Meanwhile, shares in diversified resources company Vedanta (LSE: VED) have fallen by 92% since their 2010 high of 2,919p. As such, the prospects of them returning to such a level seem remote, although it should be pointed out that Vedanta’s shares collapsed by 83% in 2008 before climbing past their previous high in the very next year. As a result, an improved commodity price outlook could lead to a soaring share price for Vedanta.
With Vedanta’s most recent update highlighting its progress on reducing costs and optimising its operations, it seems to have adopted a sound strategy to combat the low commodity price environment. And due to it trading on a forward P/E ratio of 10, it could be worth buying for the long term, although investors must be willing to accept a high degree of volatility and uncertainty alongside the capital growth prospects.
