Investing in the resources sector is always a relatively risky endeavour. That’s because price fluctuations of commodities are exceptionally difficult to predict and since they have a major impact on the financial performance of a resources company, they can turbocharge or destroy share prices in a relatively short period of time.
For example, the falling oil price has had a negative impact on Rockhopper Exploration’s (LSE: RKH) valuation over the last year, with it falling by 47%. However, the company’s shares have become increasingly popular in recent weeks as the price of oil has risen and Rockhopper is now up by a whopping 17% in the last month.
Clearly, the price of oil will make a huge difference to Rockhopper’s performance, but putting that to one side, the company appears to be relatively appealing for a small-cap exploration business. That’s at least partly because it has a reasonably strong balance sheet. This includes a substantial amount of cash that should be able to fund its near-term drilling requirements. In addition, Rockhopper has a fairly well-diversified asset base, with it having considerable potential in the Falklands as well as assets in Europe.
Despite Rockhopper’s failure to be awarded a production concession in Italy recently, its tie-up with Falkland Oil & Gas should produce a stronger combined entity that’s better equipped to face a low oil price environment. As such, and while Rockhopper is a risky buy, it could continue to make gains over the medium term.
Share price soaring
Also rising in recent weeks has been Sirius Minerals (LSE: SXX), with the company’s shares recording capital gains of 38% in the last month. That’s despite there being no significant news flow released during the period. As such, it could be a response to a more positive outlook for the wider commodities sector, with Sirius’s share price having come under a degree of pressure prior to the last month, due in part to question marks surrounding the cost of the fertiliser it plans to produce.
Although Sirius Minerals recently announced a delay to the definitive feasibility report for the planned mine in York, such challenges are to be expected when such a major project is being delivered. But with finance still being rather uncertain due in part to the risk-off attitude of investors towards the commodity sector at the moment, Sirius could be a stock to watch rather than buy at the present time.
Think long term
Meanwhile, Rare Earth Minerals (LSE: REM) continues to offer excellent long-term potential due to the expected global increase in the use of lithium. Although its shares have fallen by 29% since the turn of the year and it has no revenue at the present time, it has an upbeat long-term outlook. That view is enforced by the potential for deals with major customers such as Tesla, as well as the upbeat update released by European Metals Holding earlier this year, in which Rare Earth Minerals has a 12% stake.
Despite this, it may be prudent to invest elsewhere right now since sentiment in commodities could easily worsen if commodity prices fall. Rare Earth Minerals may have a relatively well-diversified asset base that could deliver huge profitability in future years, but with other resources stocks being profitable and offering good value right now, the risk/reward ratio of Rare Earth Minerals may be trumped by a number of its peers.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla Motors. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.