Since the turn of the year, the share prices of Gulf Keystone (LSE: GKP), Antofagasta (LSE: ANTO) and Fresnillo (LSE: FRES) have fallen by 51%, 23% and 18% respectively. Clearly, that’s hugely disappointing and shows that the resources sector has been almost devoid of any capital gains during the period. And, worryingly for investors, commodity prices are showing little sign of turning the tables on their falls of recent months, with oil dipping below $50 per barrel and other commodities also coming under further pressure.
In addition to a falling oil price, Gulf Keystone has had to endure a significant cash flow problem. With its operations being as close as twenty miles from the front line in Iraq, it is perhaps surprising that it has remained operational throughout the present conflict in the country. However, the market appears to be hugely concerned regarding its medium to long term outlook, since Gulf Keystone is struggling to keep its head above water as a result of cash flow problems, with the Kurdistan Regional Government (KRG) still apparently behind on payouts to local oil producers.
Whether this situation will ease up seems to be impossible to determine. However, even if it does, Gulf Keystone continues to offer vast risk and only limited rewards. For example, the conflict in Iraq is showing little sign of abating and, with the oil price likely to come under further pressure, margins may be squeezed and investor sentiment could worsen. Meanwhile, a price to book ratio of 1.46 does not appear to take into account such potential problems.
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That’s especially apparent when looking at the likes of Antofagasta and Fresnillo. They operate within the mining rather than oil sector, but are also struggling to cope with depressed commodity prices and weak investor sentiment. Despite this, both companies have remained profitable in recent year and, while their bottom lines have fallen considerably, their share price falls mean that, unlike Gulf Keystone, they appear to offer excellent value for money.
For example, Antofagasta is expected to increase its bottom line by 49% next year and, despite this, trades on a price to earnings (P/E) ratio of just 22.3. This equates to a price to earnings growth (PEG) ratio of just 0.3 and indicates that a wide margin of safety is on offer and that Antofagasta could deliver excellent share price gains in future. Similarly, Fresnillo is due to see earnings per share soar from around 5p last year to around 25p in 2016 and, with it also trading on a PEG ratio of 0.3, it appears to be well worth buying at the present time.
Certainly, there is scope for further weakness in the share prices of Antofagasta and Fresnillo in the short run. However, for longer term investors who can live with a relatively high degree of volatility, now seems to be a great time to buy a slice of both companies.
