One of the challenges of investing is being successful with regard to timing. Clearly, investing while the market is high or a sector is hugely popular could lead to losses if the outlook deteriorates. Similarly, buying unloved stocks with a wide margin of safety is also a sound means of putting the risk/reward ratio firmly in your favour.
So, while the outlook for the resources sector is rather downbeat, now seems to be a good time to buy a range of high quality companies in that space. Certainly, things could get worse before they get better – notably, a fall in the price of commodities could take place. However, in the long run, there is likely to be an improvement from the present situation, simply because no downturn lasts in perpetuity.
As a result, a company such as Fresnillo (LSE: FRES) seems to be a worthwhile purchase. It is the largest silver producer in the world and, unlike a number of its mining peers, has remained profitable throughout recent years. Clearly, though, the falling price of silver since 2011 has caused Fresnillo’s pretax profit to decline from over £1bn in 2011 to just £164m last year, which is a fall of 84% in only three years. As a result, the company’s share price has slumped from over £20 per share to less than £6 per share in the same time period.
However, Fresnillo seems to be worth much more than its current share price. That’s because it is financially sound, has a strong asset base and is expected to begin a turnaround in profitability this year. In fact, its earnings are forecast to rise by 145% this year, followed by further growth of 100% next year. This means that, while Fresnillo trades on a price to earnings (P/E) ratio of 49, it has a price to earnings growth (PEG) ratio of just 0.2, which indicates that the timing is right to buy a slice of the business for the long haul.
Similarly, gold mining company Pan African Resources (LSE: PAF) has been hurt by a lower gold price. This has been at least partly responsible for falling profit in recent years, with the company’s bottom line declining by 32% last year and being forecast to drop by a further 44% in the current year.
However, next year is expected to see a strong turnaround from the South Africa based miner and exploration play. That’s because its earnings are due to rise by 89% and, as a result, it trades on a forward P/E ratio of just 4.4. And, while the price of gold could continue to fall after reaching a five-year low earlier this year, Pan African Resources appears to offer a sufficient margin of safety to make now a good time to buy it even if the price of the precious metal does disappoint.
Meanwhile, Amur Minerals (LSE: AMC) remains a mining play with very bright long term prospects. In the near term, financing has the potential to cause investor sentiment to be somewhat dampened, since there will inevitably be a degree of uncertainty regarding the availability of capital and the price which Amur will need to pay to secure it.
And, while the location of the Kun-Manie project is somewhat difficult from a logistical standpoint, the news flow regarding the drilling programme that is being undertaken has been very positive. This has the potential to counteract concerns regarding financing and logistical challenges posed by the location of the mine in the shorter term, which makes now a good time to buy a slice of the business ahead of what is expected to be a very profitable future.