The resources sector can be among the most volatile stock market industries in which to invest. Changing commodity prices, operational risks and a varied economic environment can all contribute to a fast pace of change for the industry.
The share prices of gold miner Acacia (LSE: ACA) and oil exploration company Hurricane Energy (LSE: HUR) have been volatile in recent months. On Friday, the former released a trading update which sent its shares as much as 15% lower, while the latter has seen its stock price rise by 67% in the last year.
Looking ahead, does either company offer investment appeal? Or, are they simply too volatile to buy at the present time?
Political risk
Acacia’s trading update showed that the company continues to face significant political risk in Tanzania. There have been criminal charges brought against several current or former employees of the business. This could clearly have an impact on the outlook for the company, although it has been able to deliver impressive operational performance despite the challenges it has faced.
For example, in the third quarter it produced 136,640 ounces of gold at an all-in sustaining cost of $880 per ounce sold. It has been cash flow positive in the third quarter, with it now having a net cash position of $74m. It is targeting production of 500,000 ounces of gold for the full year, which would be a strong performance given the risks it has faced.
Although Acacia’s share price may continue to be volatile and its operational outlook is highly uncertain, it offers a wide margin of safety. Based on next year’s profit forecast, the stock trades on a price-to-earnings (P/E) ratio of around 6. This suggests that it may offer investment appeal for less risk-averse investors.
Changing outlook
As mentioned, the performance of Hurricane Energy has been impressive in the last year. The company has been able to move ahead with plans for first production from its Lancaster field in 2019. Recent updates have suggested that this is on track.
The company has also benefited from improved sentiment towards the wider oil and gas industry. A higher oil price has encouraged investors to take more risks within the industry, and this has led to higher valuations being placed upon a number of industry incumbents.
Looking ahead, Hurricane Energy is expected to report a pre-tax profit of $58m in the next financial year. This puts it on a P/E ratio of around 20, which seems fair given the potential for it to increase production in future years.
Clearly, the price of oil could fluctuate depending on the performance of the world economy, as well as supply growth over the medium term. But with what seems to be a sound strategy and the potential to generate improving financial performance in future, the stock could be another one of interest to less risk-averse investors over the medium term.
