For investors in the mining sector, it feels as though things just keep getting worse. Commodity prices are showing little sign of rising, profits are coming under increasing pressure and investor sentiment is declining and causing mining companies’ share prices to fall. As a result, it is of little surprise that most investors are seeking out stocks in better performing sectors such as house builders and health care.
However, the mining sector has huge long term potential to deliver stunning rewards. A quick glance at other sectors that have endured excellent years since the credit crunch, such as banking, construction and support services, shows that a period of intense decline can be followed by soaring share prices. Certainly, the mining sector may not have bottomed out, but it is very cheap and, with the market anticipating a seemingly endless supply of bad news with no light at the tunnel, now could be a great time to add mining stocks to your portfolio.
Of course, the latest major faller in the mining sector this week has been Jubilee Platinum (LSE: JLP). Its shares plunged by up to 10% yesterday, but the reason was the exercising of 10m warrants rather than negative company news flow. Of course, even with yesterday’s decline Jubilee Platinum’s share price is still up by 126% since the turn of the year which, when you consider that the price of platinum has fallen by over 20% in recent months, is a very positive result.
Looking ahead, the price of platinum may come under further pressure due to a global supply/demand imbalance that seems set to persist over the short to medium term. However, the market seems to be buying in to Jubilee Platinum’s growth strategy, with its sale of non-core assets and aim to put into operation two surface tailings projects having the potential to deliver impressive levels of profitability in the long run.
Clearly, a low platinum price could cause Jubilee Platinum’s bottom line to disappoint but, with its strategy appearing to be sound and the price of platinum unlikely to remain at what appear to unsustainable levels for a number of producers, Jubilee Platinum’s long term future appears to be relatively bright. As a consequence, buying it alongside more stable and resilient peers could be a sensible move for less risk averse investors.
Similarly, copper miner Antofagasta (LSE: ANTO) also appears to be worth buying at the present time. Unlike Jubilee Platinum, though, its shares have fallen heavily in 2015 and they are currently down 25% year-to-date. Despite this, Antofagasta’s shares still trade on a rather rich valuation, with them having a price to earnings (P/E) ratio of 26.1. However, when the company’s future growth prospects are taken into account, it means that Antofagasta trades on a price to earnings growth (PEG) ratio of just 0.3, which indicates that its shares could move significantly higher.
Meanwhile, diversified mining company Vedanta (LSE: VED) could be the beneficiary of improving investor sentiment moving forward as it is due to return to profitability after a loss-making year last year. As such, its shares could begin to recover from their 51% decline in the last year – especially since the company’s pretax profit is expected to rise from £575m in the current year to as much as £1.1bn next year.
This puts Vedanta on a forward P/E ratio of just 10.6, which indicates that there is a substantial margin of safety on offer. In other words, if Vedanta misses its guidance then its shares may not be as heavily hit as would normally be the case, while if its profit does reach the level that is currently anticipated then strong capital gains could be on the cards. Therefore, it seems to offer a relatively appealing risk/reward ratio.