The mining sector continues to offer a number of shares that trade on low valuations. Certainly, the last few years have been tough for the industry. Commodity prices have generally been under pressure and this has caused profitability across the sector to decline in many cases.
However, the future prospects of the industry appear to be improving. While commodity prices could remain volatile, investor sentiment towards the sector may pick up. As such, now could be the right time to buy these two mining shares.
Reporting on Monday was Petra Diamonds (LSE: PDL). Its performance in the first half of the year was generally in line with expectations. Its adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) and operating performance were in line with consensus expectations, but its overall performance was negatively impacted by strike action at certain South African operations. In addition, the company was unable to sell the blocked Williamson parcel, while the strengthening of the South African rand versus the US dollar also hurt its performance.
Looking ahead, Petra Diamonds has an upbeat financial outlook. It is due to report a rise in its bottom line of 110% in the current year, followed by further growth of 72% next year. Both of these figures are exceptionally high and suggest that three years of falling profitability may be quickly forgotten.
At the present time though, investors remain cautious about the company’s prospects. It trades on a forward price-to-earnings (P/E) ratio of just 5.6 using next year’s earnings forecast. This indicates that there could be significant upside potential on offer. Certainly, risks remain high and commodity price falls could cause guidance to be downgraded. But with a wide margin of safety, now could be the perfect time to buy Petra Diamonds.
Also offering upside potential in the mining sector is Rio Tinto (LSE: RIO). The iron ore specialist has enjoyed a strong period in recent months, with the iron ore price having delivered improved performance after a challenging period for the industry. Increasing demand from China after a change in investment policy has meant that the outlook for iron ore is relatively upbeat, although it remains a difficult market to predict.
However, with Rio Tinto trading on a P/E of around 12.4, it appears to offer good value for money. The company also offers an upbeat income outlook. It has a dividend yield of around 5% at the present time. With shareholder payouts being covered around 1.6 times by profit, they appear to be highly sustainable.
With Rio Tinto having kept its balance sheet in relatively good shape in recent years, it appears to offer a lower risk profile than many of its industry peers. This could mean that it is able to command a higher valuation on a relative basis over the long run. As such, it appears to be a worthwhile investment right now.
Peter Stephens owns shares in Rio Tinto. 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.