With the resources sector offering so much growth potential at the present time, diversifying may not be top of the agenda for investors. After all, with oil and mining companies being dirt cheap, it may seem to be a case of ‘fill your boots’ rather than ensuring your portfolio remains balanced and contains a mix of different types of resources plays.
However, doing the latter could prove to be crucial in the long run. That’s because, while it seems unlikely that the prices of commodities will remain so low in the long run, it is difficult (if not impossible) to determine which commodities will perform better than others. In other words, now more than ever it pays to buy high quality companies with strong finances in a range of different resources pursuits and which operate in different parts of the world.
That’s why buying the likes of Falkland Oil and Gas (LSE: FOGL), Fresnillo (LSE: FRES) and Polymetal (LSE: POLY) seems to make sense at the present time. They all have bright futures and excellent growth potential and yet offer a significant amount of diversity, too.
In the case of Fresnillo and Polymetal, there is crossover between the metals they mine, with both companies mining precious metals such as silver and gold. However, they operate in very different parts of the world, with Fresnillo being a Mexican-focused mining company and Polymetal being based in Kazakhstan and Russia. This means that, should there be challenges faced in one region, an investor’s exposure to other regions can help to offset short term problems.
Looking ahead, Fresnillo and Polymetal are forecast to post excellent earnings growth figures. For example, the former is expected to increase its bottom line by 159% in the current year, followed by growth of 96% next year. That’s a stunning rate of growth and, while Fresnillo has a rather rich price to earnings (P/E) ratio of 53.8, when it is combined with such strong growth potential it equates to a price to earnings growth (PEG) ratio of just 0.3, which indicates that its shares offer excellent value for money at the present time.
Similarly, Polymetal is also relatively cheap. Unlike Fresnillo, though, its profit growth potential is somewhat lacklustre, with it being expected to rise by just 4% in the current year. However, Polymetal has significant scope for an upward rerating, with its P/E ratio currently standing at just 9.9 and, with a dividend yield of 4.1%, it also offers superb income prospects, too – especially since dividends are covered 2.5 times by profit.
Meanwhile, Falkland Oil and Gas also appears to be worth buying. It operates in a different region to Polymetal and Fresnillo, with it having exposure to South America. And, with its drilling programme for the current year progressing extremely well, it is of little surprise that its shares have risen by an impressive 17% since the turn of the year. Crucially, Falkland Oil and Gas has sound finances, with its drilling programme being fully costed out and, as a result, it offering greater stability and resilience than many similar-sized exploration plays.
Certainly, profits may be some years away but, with its operational performance being strong, Falkland Oil and Gas appears to be worth buying alongside other resources stocks such as Fresnillo and Polymetal, with there being significant potential for excellent long term gains.