One of the key stories of 2016 has been the appreciation of the US dollar. This follows the Federal Reserve’s decision to raise interest rates in December and means that the US dollar is at its strongest versus the pound since May 2010.
Looking ahead, further appreciation in its value may occur and this would be bad news for the price of gold and for gold miners such as Centamin (LSE: CEY). That’s because non-interest bearing assets such as gold become relatively less appealing in a higher interest rate environment, which means that gold prices have historically performed poorly during periods of monetary policy tightening.
While this is not good news for Centamin, fears surrounding the global economic outlook could prove to be. That’s because gold could be seen as a store of wealth during an uncertain time (just as it was during the credit crunch) and, with US interest rate rises set to be slow and steady, the gold price may perform better than is currently being expected.
Of course, Centamin’s profitability should increase even if the price of gold comes under pressure, since the company is ramping up production. In fact, its bottom line is forecast to rise by 19% in 2016 which, alongside a price to earnings (P/E) ratio of 14, indicates that now could be a good time to buy a slice of the company for the long term.
Meanwhile, support services company Lamprell (LSE: LAM) also trades on an appealing valuation. Using the net asset value figure from the company’s most recent interim results, Lamprell trades on a price to book value (P/B) ratio of only 0.75, which indicates that there is a relatively wide margin of safety on offer.
Certainly, write downs could occur if the oil price remains under pressure and Lamprell’s earnings continue to fall. But with the company’s bottom line expected to fall by just 2% in 2016, its financial performance could be about to stabilise following a very challenging 2015. And with Lamprell yielding 4.3% from a dividend which is covered 3.5 times by profit, it appears to be a rather enticing income play, too.
With the likes of Centamin, Lamprell and other resource-focused companies still being in profit and offering relatively appealing valuations, stocks such as Sirius Minerals (LSE: SXX) may find investment more difficult to come by. That’s because Sirius Minerals is many years away from becoming an operating potash miner, with approval for its proposed mine only being granted last year.
This means that there will be a period of major investment over the medium term and finding lenders or investors given the uncertainty and fear which has consumed the resources sector may prove to be difficult. That’s despite the polyhalite fertiliser which Sirius Minerals aims to produce performing well in crop studies and already having buyers lined up for future sales.
So, while Sirius Minerals could prove to be an excellent long term purchase, the appeal of other resource-focused stocks remains stronger. Therefore, buying the likes of Centamin and Lamprell appears to be a better move than buying Sirius Minerals, Â given the resources sector’s current operating environment and outlook.