What do resource stocks Centamin (LSE: CEY), Lonmin (LSE: LMI), Enquest (LSE: ENQ) and Cairn Energy (LSE: CNE) have in common?
As I write, all four companies trade significantly below their tangible book value:
|
Company |
Price/ tangible book ratio |
|
Lonmin |
0.4 |
|
Enquest |
0.5 |
|
Cairn Energy |
0.7 |
|
Centamin |
0.8 |
For value investors, a discount to tangible book value is a key buying signal that can deliver big gains — but some caution is required.
In today’s markets, discounts to tangible book value are rare, and often indicate an underlying problem.
On the other hand, gold, platinum and oil — the three sectors represented by Centamin, Lonmin, Enquest and Cairn — are all out of favour at the moment. If market conditions improve, these shares could easily double in value.
Let’s take a closer look.
Lonmin
South African platinum miner Lonmin is struggling with labour and cost problems, uncertain future demand, and a weak platinum price. In addition, Lonmin’s largest shareholder, Glencore, is about to give away its 24% stake in the firm.
Yet Lonmin has virtually no debt, and trades at just 40% of its most recent book value: I’m seriously considering a small investment.
Enquest
The oil price crash came at a bad time for heavily-indebted Enquest, which is in the middle of developing two costly North Sea projects, Alma/Galia and Kraken. However, oil should flow from Alma/Galia later this year, and the firm has managed to relax the terms of its debt.
If oil prices rise into 2016, an investment now could deliver big gains, but net debt of $932m makes it too risky for me.
Cairn Energy
About 100p of Cairn’s share price is covered by the company’s $869m cash balance. Sadly, this may have to fund the firm’s exploration activities until 2017, when it should start receiving production revenue from its stakes in North Sea fields Catcher and Kraken.
Cairn also has a promising recent discovery off the coast of Senegal, but as with Enquest, a buy now is a bet on a rising oil price, in my view.
Centamin
Shares in Egyptian gold miner Centamin have doubled since 2013, when they briefly traded at around 30p — around 0.4 times book value.
Centamin is profitable, has net cash and offers a 3.2% yield — but the miner is mired in legal cases that could — in a worse-case scenario — see the firm’s mining licence withdrawn.
In my view, the price reflects the risk, and is no longer cheap enough to tempt me in.
Today’s best buy?
All four of these companies could deliver 100% gains over the next year, but I’m pretty sure not all of them will.
In my view, Lonmin and Cairn deserve a closer look, as long as you can handle the extra risk.