It is time to be bold and put fresh money into bombed-out commodity stocks such as Antofagasta (LSE: ANTO), Randgold Resources (LSE: RRS) and Tullow Oil (LSE: TLW)?
In this article, I’ll take a closer look at each company and ask whether now is the right time to get involved.
Antofagasta
Glencore‘s recent decision to shut down production at two large copper mines may have been driven by the firm’s own debt problems, but it’s good news for dedicated copper producers like Antofagasta. As I write, mining shares are on the slide again, but Antofagasta’s share price has held firm and is essentially unchanged so far today.
I’ve been getting very interested in this firm recently. The sale of its water business and the purchase of a 50% stake in a large Chilean copper mine should be good for long-term earnings.
Even after this $980m acquisition, Antofagasta should have a small net cash balance. The firm expects full-year cash costs to be $1.47/lb, well below today’s market price of $2.47/lb. In my view this is a high quality business. The only question is whether it’s cheap enough.
Antofagasta shares currently trade on a 2016 forecast P/E of about 17.5. That’s not outstandingly cheap, although the shares do offer a 2% yield that’s backed by free cash flow. Although a further dip is possible, I reckon these shares are a buy for the long term.
Randgold Resources
Another high quality performer in the mining sector is Randgold Resources.
Randgold has always calculated its reserves using a gold price of $1,000 per ounce. This has enabled it to remain debt-free and profitable throughout the gold bear market. Randgold’s second-quarter figures showed net cash of $109m and a 15% rise in quarterly profit.
Although the dividend yield is low, at 1%, this payout is backed by free cash flow and should continue to rise. Randgold shares currently trade on 22 times 2016 earnings. That’s not cheap, but I’m pretty confident that both production and profit will rise steadily over the next few years.
In my view, Randgold is one of the safest buys in the mining sector.
Tullow Oil
Tullow shares have fallen by 72% over the last year, compared to a 25% fall for the wider Oil & Gas Producers sector. I believe that the reason for the decline isn’t so much falling profits from lower oil prices, but Tullow’s ballooning net debt, which was $3.6bn at the end of the June.
In order to develop its TEN project in Ghana, Tullow has taken on a lot of debt. Although it’s normal practice for oil firms to use debt to develop new projects, it’s unfortunate that Tullow’s borrowing binge coincided with what looks like a long-term fall in oil prices.
Tullow shares now trade on a 2016 forecast P/E of 13. At first glance, this looks quite reasonable. However, the firm has already indicated that it may need to sell stakes in some of its major producing assets in order to repay debt and strengthen its balance sheet.
Doing so would improve Tullow’s financial situation, but would reduce its medium-term earning power. In my view Tullow remains risky, so I’m not keen on investing at this time.