European investors are currently breathing a sigh of relief as local bourses rebound strongly from ‘Black Monday’. Whether this perky run can be sustained is another question entirely, of course, but one thing is for certain — bargain hunters should continue to steer clear of stocks with heavy exposure to commodity markets.
Traders are filling their boots with mining stocks after fears over China sucked prices lower yesterday, and BHP Billiton, Glencore and Antofagasta are representing the top three risers in today’s session. But it should not be forgotten that sustained concerns over commodity market imbalances has driven these firms’ stock prices 47%, 59% and 29% lower respectively during the past 12 months.
Falkland falters
This giddy trading backdrop even helped drive shares in explorer Falkland Oil & And Gas (LSE: FOGL) to the upside despite warnings of fresh difficulties. The London firm swallowed a $1.96m pre-tax loss in the first six months of 2015, increasing from the $1.3m loss printed in the same 2014 period.
Falkland also advised that results from its deepwater Humpback well were not expected until next month due to “a series of unforeseen equipment and operational issues” — work had been expected to be completed this month. On top of this, cash balances also collapsed to $40.1m from $68.7m at the same point last year. As revenues are not expected to flow in for some time yet, I believe Falkland is at severe risk of significant balance sheet deterioration, particularly if crude prices keep on sinking and the economic viability of its projects come under increased scrutiny.
Reduced revenues smash James Fisher
Naturally the result of tanking oil prices can play havoc with related industries, and so it was the case with rig builder James Fisher & Sons (LSE: FSJ) during the first half. The business announced that weakness at its Offshore Oil division drove pre-tax profit to £17.8m during January-June from £21.9m a year ago. James Fisher commented that clients had “postponed all but the most urgent maintenance and repair expenditure” in light of persistent market difficulties.
Operators across the natural resources sector are repeatedly taking the hatchet to their capex budgets, and BHP Billiton just today cut its spending target to $8.5bn for this year from $9bn previously. As commodity prices continue to sink, and oil and metals producers consequently ramp up their cash-saving measures, the outlook is likely to remain equally worrisome for James Fisher and other support service providers.
Weak gold dents Polymetal
And gold miner Polymetal International (LSE: POLY) is also facing the prospect of prolonged revenues pain as precious metals also slide. The Jersey company noted today that revenues fell 11% during January-June, to $648m, as gold and silver prices ducked 7% and 18% correspondingly during the period. Although cash costs came down, pressure on the top line forced adjusted earnings 4% lower to $297m.
Even though gold’s role as a traditional safe-haven have enabled the price to remain stable around $1,150 per ounce in recent days, hurdling the weak sentiment washing across most other asset classes, the outlook for the yellow metal remains uncertain as an environment of low inflation, weak physical demand and caution surrounding Fed rate hikes continues to hover. Consequently I expect sales at Polymetal to keep languishing.