The present time is a rather uncertain one for investors in mining stocks. After all, it seems as though very few commodities have not seen their prices hit hard in recent months, with a global deflationary spiral causing prices of commodities such as iron ore, gold and oil to hit multi-year lows.
As a result, many mining companies have endured rather difficult periods, with their profitability coming under severe pressure. One such company is Polyus Gold (LSE: PGIL), which is Russia’s largest gold producer. It made a loss in 2014 and, while gold has hit a five year low this year and recently caused its quarterly sales to fall by 8%, it is expected to bounce back strongly in the current year. In fact, its earnings are due to reach 13.7p on a per share basis this year, which puts the company on a price to earnings (P/E) ratio of just 13.8.
And, looking ahead, it is forecast to increase earnings by over 21% in 2016 which, when combined with its rating, equates to a price to earnings growth (PEG) ratio of just 0.7. This indicates that upbeat share price performance could lie ahead, with gold producers having the added advantage of being inversely correlated to the outlook for the global economy.
Of course, there are other mining companies with capital gain potential. For example, Petra Diamonds (LSE: PDL) may have posted a fall in its share price of 20% since the turn of the year, but its upbeat earnings forecasts could cause investor sentiment to pick up. In fact, the diamond mining business is expected to grow its bottom line by around 46% next year and, encouragingly for its investors, such a strong rate of growth does not appear to be priced in.
For example, Petra Diamonds currently trades on a P/E ratio of 24.6 which, when combined with its earnings growth prospects, equates to a PEG ratio of just 0.5. This indicates that its shares offer a very wide margin of safety so that if the company disappoints and earnings come in lower than expected, its shares may not be hit as hard as would normally be the case. And, with Petra Diamonds set to raise dividends by 45% next year, it shows that management is confident in the outlook for the business and is not hoarding all available cash in case of further declines.
Meanwhile, Amur Minerals (LSE: AMUR) continues to experience very encouraging news flow. Most recently, it has signed an agreement with the Far East and Baikal Region Development Fund which should make it a lot easier for the company to attract financing for its Kun-Manie project. Clearly, there is still a long way to go and Amur Minerals needs to overcome the major question as to how it will fund the $1bn+ project. But, the deal makes things easier and, crucially, it shows that the project has local backing. And, with it being a world-class asset, this combination should provide the cash needed for Amur Minerals to deliver excellent profitability in the long run.
However, with the current uncertainty within the mining sector, it seems prudent to stick to companies that are profitable now and, with Petra Diamonds offering stronger growth prospects at a more appealing price than Polyus Gold, it seems to be the pick of the three stocks at the present time.