Life as an investor in resources companies has been tough in recent years. Commodity price falls and uncertainty regarding future demand and supply have left investors feeling lukewarm (at best) towards the sector. However, 2016 has seen the share prices of a number of resources companies soar.
Chief among them has been Randgold Resources (LSE: RRS). The gold miner has risen by over 100% since the start of the year and a key reason for this has been a surging gold price. Gold is up by 26% year-to-date and this has been caused by increased fear among investors regarding the global growth outlook, with them turning to lower-risk assets such as gold. Furthermore, a lack of interest rate rises by the Federal Reserve has also made gold more appealing versus interest-producing assets.
However, with interest rate rises ahead and the global economic growth outlook being strong, gold may struggle to repeat its gains of 2016 over the next eight months. For Randgold, this means that its profit growth outlook may come under a degree of pressure. But with its shares having a price-to-earnings growth (PEG) ratio of 0.9 they still offer 30%-plus upside as well as defensive characteristics due to gold’s status as a perceived safer asset.
Growth and income appeal
Of course, Randgold isn’t the only resources company with 30%-plus upside. Iron ore specialist Rio Tinto (LSE: RIO) has a new management team and it’s likely to benefit from higher demand from China following its improved performance in 2016. And with Rio Tinto likely to invest more heavily in other divisions such as aluminium in future, it’s set to become an increasingly diversified and lower-risk company in the coming years.
Allied to this is an ultra-low valuation that provides major upward rerating potential. Rio Tinto trades on a price-to-book (P/B) ratio of just 1, which indicates that there’s at least 30% upside. And with its dividend policy being sensible in terms of it being a percentage of earnings each year and providing a yield of 3.6%, Rio Tinto appeals to both income, growth and value investors alike.
Meanwhile, BHP Billiton (LSE: BLT) remains one of the best diversified mining majors in the FTSE 100. It has considerable exposure to oil, copper and iron ore even after its South32 spin-off. This provides it with a lower risk profile than the likes of Rio Tinto and Randgold at the present time.
Looking ahead, BHP is forecast to increase its bottom line by 164% in the next financial year. This puts it on a PEG ratio of only 0.2, which indicates that it offers superior value for money when compared to Randgold Resources.
Its yield of 2.3% may not match up to Rio Tinto’s yield, nor does its P/B ratio of 1.1 offer greater upside than its iron ore peer. However, with BHP’s profit set to rise at a rapid rate, investor sentiment towards it could rise at a faster pace than for either Rio Tinto or Randgold Resources.
While all three stocks are worth buying right now and all offer 30%-plus upside, BHP has the most diverse asset base and could reach 30% gains faster than Rio Tinto and Randgold from now on.
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Peter Stephens owns shares of BHP Billiton, Rio Tinto, and South32. 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.