Today I am looking at the investment prospects of three battered commodity stocks.
Diversification provides no consolation
As prices of all major commodities continue to steadily sink, I believe investing in mining and energy giant Vedanta Resources (LSE: VED) is not for the faint of heart.
The business revealed last month that revenues and earnings slipped 12% (to $5.7bn) and earnings fell 39% (to $1.3bn) between April and September, as the prices of zinc, copper, aluminium, oil and iron ore continued to slide. In the light of these results Vedanta Resources elected to bin the interim dividend.
Diversification often provides strength, because it decreases dependence on one key market. But for producers like Vedanta Resources this comes as little comfort as the supply/demand dynamics across all markets continue to worsen.
US Energy Information Administration (EIA) data released just yesterday showed US oil inventories unexpectedly climb yet again in the week to December 25, with an increase of 2.6m barrels defying predictions of a 2.5m barrel decline. And OPEC pushed the Brent benchmark back down towards 11-year troughs around $36 per barrel by vowing once again to keep production rolling.
While economic data from commodities-glutton China continues to disappoint, and major resources plays like Vedanta Resources keep on hiking production, I believe investment in the commodities segment will remain risky business.
Explorer on the ropes
On top of yesterday’s worrying developments, oil explorer Genel Energy (LSE: GENL) gave further cause for concern in Thursday business, following a disappointing operational update.
The Jersey-based business — which has shed more than three-quarters of its value since January — advised that it was plugging and abandoning the Aigle-1X exploration well in the Cote D’Ivoire after failing to strike oil. Genel Energy has now completed its planned drilling work in the country.
Of course, the business of oil exploration is fraught with disappointments such as the one recently experienced by Genel. But with the business also facing the prospect of further crude price falls, not to mention the risks associated with operating in the economically and politically unstable region of Kurdistan, I reckon the firm is a risk too far at the present time.
Copper firm under the cosh
And I believe the potential pitfalls also outweigh the prospective rewards over at dedicated copper producer Antofagasta (LSE: ANTO).
Earlier this month the business acquired a 50% holding in the high-quality ZaldÃvar copper mine in Chile from Barrick Gold. It comes as little surprise, however, that the news has failed to propel Antofagasta’s share price higher, as concerns over its earnings outlook persist.
On top of the aforementioned supply/demand imbalance washing over the copper market, the prospect of further strengthening of the US dollar in 2016 and possibly beyond threatens to put further pressure on the greenback-denominated commodities.
In this environment I believe Antofagasta, like resources peers Vedanta Resources and Genel Energy, can expect further share price turmoil in the months ahead.