With the resources sector undergoing a very challenging period at the moment, the market seems to be placing a premium on companies that have sound finances. Certainly, this does not mean that companies which require financing or which may need to raise funds in the near future have no hope of delivering excellent share price performance. However, it does mean that investors are more nervous regarding further price falls in commodities and, as such, are arguably becoming more risk averse.
As a result of this, investing in resources companies that are already highly profitable and are expected to continue to be so even with falling commodity prices seems to be a sound move. And, with the share prices of a large number of resources companies having come under pressure, there are some excellent value options on offer.
For example, gold miner Randgold Resources (LSE: RRS) has remained profitable throughout the last five years despite the gold price coming under severe pressure. In fact, Randgold Resources’ net profit has remained remarkably strong and, as of last year, was 2.4 times larger than it was in 2011. This should provide investors in the company with confidence in its future performance – especially since gold prices can be inversely related to the outlook for the global economy.
In addition, Randgold Resources has the potential to become a relatively appealing income stock. It may only yield 1.1% at the present time but, with earnings set to grow by 23% next year, this situation could change if Randgold Resources decides to increase shareholder payouts. And, with it having a payout ratio of just 25%, a yield of 3%+ could be very achievable with a payout ratio of 67% over the medium to long term.
Of course, not all mining companies have been able to remain profitable in recent years. Vedanta (LSE: VED), for example, made a £3.7bn loss last year, which went some way to undoing the £4.8bn in pretax profit that had been generated in the four prior years. Although disappointing, Vedanta is expected to bounce back with pretax profit of £490m this year, followed by further profit of over £1bn next year.
While they are forecasts, the market appears to be backing Vedanta to deliver, since its shares have outperformed the FTSE 100 by 13% in the last month alone. And, while Vedanta’s yield of 8% may not continue in the medium term as a result of it being almost a 100% payout ratio of profit next year, the company’s financial future remains bright and the market could reward this moving forward.
Meanwhile, York potash miner Sirius Minerals (LSE: SXX) has had a superb year, with its shares rising by 68% year-to-date off the back of approval for its proposed mine. Furthermore, the mine could become hugely profitable and lead to additional gains for the company’s investors in the long run.
However, Sirius Minerals must now raise the cash required to build the mine. This is likely to cost anything up to £2bn and, while crop studies have generally progressed as planned and demand for the company’s produce is likely to be buoyant, raising such a large amount of cash can be more challenging in theory than in practice – especially when the market is somewhat nervous regarding the prospects for the wider resources industry.
And, with the potential for delays and disruption (as was the case in the process for obtaining planning permission), Sirius Minerals may see its share price come under pressure in the short to medium term. For the long term, though, it remains a sound, albeit risky, investment proposition.
