Life as an investor in mining stocks has been challenging of late, with the prices of most commodities enduring major falls. However, the prospects for the sector could be a lot brighter than current valuations suggest, since the global economy continues to move in the right direction and, while Chinese growth of 7% per annum may be less than hoped for, it is still likely to translate into strong demand for resources over the long run.
One metal which has disappointed this year is gold, with its price reaching a five-year low despite the uncertainty regarding Chinese growth and the pending rise in US interest rates. Viewed as a store of value by many investors, its price often moves inversely to investor sentiment, so its challenging year is rather surprising.
Still, gold miners such as Centamin (LSE: CEY) have excellent long term growth potential. Its update today shows that production for the third quarter of the year is in-line with previous guidance and the company is on-track to meet full-year expectations. This means that gold production from its Sukari mine in Egypt is expected to reach between 430,000 and 440,000 ounces in the current year, which is a big step towards its long term goal of producing 500,000 ounces by 2017.
This increase in production is likely to equate to higher profitability for Centamin, since it remains a relatively efficient mining operation. As such, its bottom line is forecast to rise by 20% next year and this puts it on a forward price to earnings (P/E) ratio of just 11 which, alongside a dividend yield of 2.9%, makes it an appealing purchase at the present time.
Similarly, Antofagasta (LSE: ANTO) also has upbeat earnings growth prospects. The copper price may continue to come under pressure, but Antofagasta is still expected to grow its bottom line by as much as 61% next year. This puts it on a price to earnings growth (PEG) ratio of only 0.3, which indicates that its shares may be severely undervalued at the present time following their fall of 22% in the last six months.
Antofagasta also has considerable potential to make increased dividend payments in future. That’s because its payout ratio is due to stand at just 35% next year so, while it yields just 1.7% at the present time, it has the potential to become a strong and sustainable income play over the medium to long term.
BHP Billiton (LSE: BLT), though, may be forced to cut its dividends over the medium term. That’s because they are currently not covered by profit and, while this situation can be coped with in the short run, in the longer term BHP will need to either dramatically increase profitability or else reduce shareholder payouts.
This, though, seems to be adequately priced in, with BHP currently yielding 7.2%. And, with the company in the process of making major changes to its business model, which have included a spin-off of non-core assets, a revised capital expenditure programme and considerable efficiencies being sought, it seems to be in a strong position to deliver improved performance in future. This, plus a very strong balance sheet, make it a mining play worth buying for the long term.