2015 has been a disappointing year for the mining sector, with the majority of its incumbents underperforming the FTSE 100 since the turn of the year. For example, Lonmin (LSE: LMI) and Anglo American (LSE: AAL) (NASDAQOTH: AAUKY.US) are heavily in the red this year, having fallen by 27% and 15% respectively, while Antofagasta (LSE ANTO) and Centamin (LSE: CEY) are well behind the FTSE 100’s 7% gain, with their share prices falling by 3% and rising by 2% respectively.
However, this could be the perfect time to buy them, with all four companies trading at very appealing share prices.
Growth Potential
While 2015 is expected to be a mixed bag for the four companies, next year is forecast to be much brighter. Certainly, commodity prices may fail to stabilise or improve, but efficiencies and rationalisation are set to have a considerable impact on the wider sector, thereby causing its outlook for 2016 to be relatively strong.
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For example, Centamin is expected to see its bottom line rise by 28% next year, which is roughly four times the growth rate of the FTSE 100. Certainly, its forecasts may change somewhat between now and then, but its current valuation appears to provide investors in the stock with a very wide margin of safety. This is evidenced by its price to earnings (P/E) ratio of just 11.1, which when combined with its growth potential equates to a price to earnings growth (PEG) ratio of just 0.3. As such, Centamin’s share price could move much higher.
It’s a similar story with the likes of Antofagasta, Anglo American and Lonmin. Their bottom lines are set to rise by 29%, 35% and 380% respectively between 2015 and 2016. This puts them on PEG ratios of just 0.5, 0.3 and 0.2 respectively, all of which indicate that considerable capital gains are on offer and, perhaps more importantly, that disappointment on the earnings front is being priced in. In other words, wide margins of safety are on offer right now.
Risks
Clearly, all four companies are at risk from price weakness in their chosen commodity markets. This could cause write downs to their asset base, which would clearly impact heavily on their bottom lines and valuations moving forward. However, the outlook for the commodity markets is significantly better than has been its performance in recent years, with an improving global economy and the potential for Chinese stimulus likely to mean that pricing is more appealing in future.
And, even if commodity prices do weaken, the likes of Centamin, Antofagasta, Anglo American and Lonmin trade on such appealing valuations that, for long term investors, it makes sense to buy them now due to their very favourable risk/reward profiles.
