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Is this value small-cap stock a falling knife to catch after dropping 15%+ today?

Buying shares in companies that have recently released disappointing news can be a difficult move for investors to make. After all, no share falls significantly without good reason. And in the short run at least, there is danger of further share price declines.

On the flip side, though, the potential rewards from buying out-of-favour stocks can be significant. They are often trading with wide margins of safety included in their price, and investor sentiment can quickly change should announcements become more positive. With that in mind, could this 15%+ share price faller be worth buying right now?

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Disappointing update

The company in question is natural resources exploration and development company, Metals Exploration (LSE: MTL). It announced on Tuesday that the Runruno gold mining operation has continued to experience difficulties in the BIOX (bacterial oxidation) circuit ramp-up. The company has reported encouraging results when the BIOX circuit ramped-up strongly to around 50% throughput. However, it has once again passivated with currently limited material being processed through the BIOX circuit.

Initial test work has suggested the presence of algae in the return process water has interfered with the performance of the BIOX bacteria. Engineering solutions have been identified to manage the presence of the algae and are currently being implemented. Clearly, there is no guarantee that the issues experienced will be solved within the near term, and this could lead to further pressure on the company’s share price.

The company also reported that it is in advanced talks with its major shareholders to try to procure mezzanine finance which would be sufficient to repay the $12m bridging loans it currently has, as well as meet working capital requirements.

Given the wide range of stocks with bright futures in the resources sector, Metals Exploration may be a stock to watch, rather than buy, at the present time. It appears to have a highly uncertain future which could lead to a further decline in investor sentiment. Therefore, even though it is now much cheaper than it has been of late, it may be a stock to avoid for the time being.

Difficult trading conditions

Also falling heavily after releasing news on Tuesday was Action Hotels (LSE: AHCG). Its shares fell by as much as 10% after it released results for the first half of the year. They showed growth in revenue of 10%, while gross profit moved 6% higher. The company benefitted from having a 13% increase in operating rooms versus the same period of the prior year. Its occupancy rate at its mature hotels, however, fell by 2% to 72.7%.

Trading conditions remain tough in certain markets in the Middle East, although the company has confirmed that it is on track to meet market expectations for the full year. It has conducted a review of its pipeline and has decided to delay the openings of two of its leasehold hotels in Saudi Arabia. This is designed to efficiently manage its cash and debt position, and only minimally impacts on its 2017 forecasts.

With a sound growth strategy and strong performance in Australia and the Middle East, despite mixed conditions, Action Hotels could recover from its recent share price fall. It remains a relatively risky stock which may have an uncertain future. However, for less risk-averse investors it could be worth a closer look.

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Peter Stephens does not own shares in any of the companies mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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