Hochschild Mining (LSE: HOC) announced its first half results on Wednesday, and adjusted EBITDA more than halved in the first half of 2015, to $39.3 million, as it suffered from lower commodity prices and falling production levels. However, the silver and gold miner is optimistic that it will deliver significantly higher production in the second half, following the completion of the development of its Inmaculada mine in Peru.
Falling commodity price has meant that Hochschild will delay its expected return to profitability by another year. Analysts currently expect the miner will make an underlying loss of 5.1 pence per share in 2015. In 2016, analysts expect Hochschild will earn 1.9 pence per share, which gives it a pricey forward P/E of 66.0. With silver and gold prices continuing to slide, these valuations do not seem to justify the very real risk that Hochschild will further delay its return to profitability.
Fresnillo (LSE: FRES) is a lower-cost silver producer. Its average all-in sustaining cost of production for silver is estimated to be as low as $8.50 per ounce, which compares favourable to Hochschild estimated costs of between $15 to $16 per ounce. Its valuations are slightly more reasonable. On its 2015 expected earnings, it has a forward P/E of 57.6, but based on its 2016 earnings, it trades at a forward P/E 26.0. This is because of the anticipated expansion in production following the lifting of the ban on the use explosives in mining and the tapering of initial investment expenses.
Randgold Resources (LSE: RRS) is more attractive with its gold mining operations, as its average gold production costs are estimated to be $700 per ounce. This compares very favourably to Fresnillo’s average costs of around $960 per ounce and today’s spot price of $1,127. Shares in Randgold have a forward P/E ratio of 26.9, but this ratio is expected to fall to 21.7 on its 2016 earnings. Although Randgold seems to be the most attractive of the three on a valuations and cost perspective, shares in Randgold still seem too expensive.
The outlook for oil producers has deteriorated more quickly than the miners of precious metals, as the price of crude oil has fallen even more steeply in recent months. But, like gold and silver miners, there are significant variations between the costs of different oil producers.
Premier Oil’s (LSE: PMO) focus on North Sea oil production means it is a relatively higher cost producer. Average costs per barrel are around $60 per barrel in the North Sea, but some of its younger assets are less costly. In addition, infrastructure costs in the North Sea are rising, as when older wells are decommissioned, the fixed costs of maintaining the infrastructure are divided amongst fewer wells.
Gulf Keystone Petroleum (LSE: GKP) is one of the lowest cost producers in the sector. Focusing on the Kurdistan region of Iraq, Gulf Keystone’s cash operating costs are just $11.8 per barrel of oil equivalent (boe). Unfortunately, drilling in Kurdistan has its drawbacks. The Kurdistan Regional Government has delayed payments from the exports of crude on its own account, and the political turmoil in the region continues to pose risks to its strategy of ramping up production there. But, where there is uncertainty, there is also opportunity.
With the deteriorating outlook for most commodities, I would only consider investing in Gulf Keystone Petroleum. It is a very low cost producer and its valuation does not seem to justify the value of its oil producing assets. A likely resumption to regular payments from the Kurdistan Regional Government is a very real possibility, and this could act as a catalyst to boost its valuation in the short term.
