Investors in the oil and mining sectors have endured a very tough year. Falling prices, declining profitability and weakening investor sentiment have contributed to one of the worst years in living memory for the resources sector. And, with Chinese growth prospects coming under the microscope of late and there being a major supply/demand imbalance across the globe, the short term appears to offer little more than further pain for shareholders of resources stocks.
However, now could prove to be an excellent time to build positions in such companies. That’s because, as history tells us, the best time to buy any stock is when ‘blood is running in the streets’. And, while a financial meltdown may not be just around the corner for the global economy, for resources companies the future looks very bleak.
For example, after two years of earnings declines that have seen its bottom line fall by two-thirds, copper miner Antofagasta (LSE: ANTO) is expected to post a further drop in earnings this year. However, looking ahead to next year, the situation may change rapidly, since Antofagasta is expected to increase its net profit by 43% in 2016. This could act as a positive catalyst on the company’s share price and, with it having a price to earnings growth (PEG) ratio of just 0.4, it appears to offer a wide margin of safety so that even if its guidance is downgraded, its shares have scope to rise.
Similarly, KAZ Minerals (LSE: KAZ) is due to continue to post a loss after doing so last year. This could cause investor sentiment to decline in the short run, thereby pushing the company’s share price even lower (it has fallen by 42% in the last year). However, the expected loss this year is forecast to be a major improvement on last year’s figure, with KAZ’s pretax loss set to fall from £113m last year to just £9m this year. And, looking ahead to next year, KAZ is due to move back into profitability, which could boost investor sentiment and act as a positive catalyst on its share price.
Meanwhile, oil producer LGO Energy (LSE: LGO) has also seen its share price come under pressure in the last year, with it being down 14% in the last twelve months. However, its progress as a business has been very encouraging, with its drilling programme delivering impressive results and the 2016 drilling programme already beginning to take shape via prospects at Trinidad’s Cedros peninsula. And, while profitability may not have yet been achieved, LGO has stated that it remains economically viable even within a low oil price environment, which could differentiate it from other small oil producers and explorers and cause investor sentiment to improve over the medium to long term.
So, while resources stocks are unpopular and relatively high-risk, they could turn out be sound long term buys for investors who can live with above average volatility and the potential for short term paper losses.