The last week has been particularly painful for the resources sector, with doubts surrounding global demand for commodities such as oil, gas and iron ore causing investors to sell up and walk away.
Clearly, it is tempting to follow them when the industry is experiencing such a rough patch and especially when there seems to be little light at the end of the tunnel. Indeed, the prices of a range of commodities could easily fall further, with a floor not yet in sight due to the nervousness of investors across the world.
However, for long term investors who are perhaps towards the less risk averse end of the investing spectrum, this may be a once-in-a-decade opportunity to buy the most promising resources companies at a fraction of their intrinsic value. Certainly, their prices may fall in the short run but, in the longer term, they could prove to be excellent investments.
One such opportunity is platinum producer Lonmin (LSE: LMI). Its financial performance has been rather mixed in recent years, with two of the last five including a red bottom line. And, looking ahead to the next two years, its losses are set to continue, with Lonmin expected to post as pretax loss of £90m this year followed by a further £20m loss next year.
Clearly, there is little for investors to get excited about in the short run but the potential in Lonmin is in its valuation. Sure, losses may cause the value of its net assets to fall, but Lonmin trades on a super-wide margin of safety which indicates that in the coming years its share price could move upwards at a rapid rate. In fact, following the fall in Lonmin’s share price of 15% in the last week, it now trades on a price to book value (P/B) ratio of just 0.06.
To put this in context, a company would normally be expected to trade at a premium to its net asset value to reflect the goodwill that it has as a business. However, Lonmin currently has £2.17bn of net assets and is valued by the market at just £123m, which indicates that it really is dirt cheap.
Similarly, Tullow Oil (LSE: TLW) is also trading on a staggeringly low valuation. Unlike Lonmin, it is expected to move back into profitability this year with a pretax profit of £81m. And, looking ahead to next year, pretax profit is forecast to rise significantly to around £200m. Clearly, there is scope for both of these figures to be downgraded and, with the oil price continuing to show little sign of an upward movement, it would not be a major surprise for that to happen.
However, the risk/reward ratio for Tullow remains favourable in spite of that prospect. That’s because, like Lonmin, it trades at a sizeable discount to its net asset value, with Tullow having a P/B ratio of just 0.69. Furthermore, Tullow offers a price to earnings growth (PEG) ratio of just 0.1, which indicates that now is a good time to buy ahead of the prospect of excellent long term gains.
Meanwhile, the last week has also been tough for Amur Minerals (LSE: AMC), with its share price having dropped by almost 10%. However, this is most likely due to general sector weakness rather than being anything company-specific, since Amur is making excellent progress with its Kun-Manie prospect in Russia.
Certainly, financing issues may hold back Amur’s share price performance in the short run, since it is a major prospect which, it could be argued, has come along at a bad time. In other words, with investors being bearish on the sector, Amur may find it more challenging to find the funds necessary to build the required infrastructure. However, with upbeat news flow regarding the project and a world-class asset, Amur still appears to be a top quality, albeit speculative, resources play for the long term.