Why I’d Buy Fresnillo plc And Randgold Resources Limited Over African Potash Ltd And Beowulf Mining plc

Fresnillo Plc (LON: FRES) and Randgold Resources Limited (LON: RRS) are more appealing just now than smaller peers African Potash Ltd (LON: AFPO) and Beowulf Mining plc (LON: BEM).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The last couple of years have been hugely challenging for the mining sector, with weak commodity prices leading to reduced profitability and weakening investor sentiment. While the recent past may be mirrored over the short-to-medium term, long term investors may wish to consider the purchase of mining companies that have brighter outlooks. That’s because in some cases they offer a relatively wide margin of safety and trade on very appealing valuations.

While things could realistically get worse before they get better for mining companies, that could mean buying companies that offer size, scale and profitability could be a shrewd move for investors. That’s because the larger mining companies may have the most appealing risk/reward ratios in terms of offering low prices and upward rerating potential, as well as a track record of profitability and relative financial soundness.

Going For Gold

Fresnillo (LSE: FRES) is among the largest silver producers in the world and Randgold Resources (LSE: RRS) has the same status among gold producers. With their share prices having fallen by 62% and 28%, respectively, since the start of 2013, it’s clear that they’re trading at a low ebb. That’s no surprise after their huge falls in profitability, with Fresnillo’s earnings per share (EPS) declining by 93% in the last three years and Randgold Resources’ EPS being 47% down in just two years.

While these EPS figures are hugely disappointing, both companies have been able to stay in profit throughout the price falls in gold and silver. And looking ahead to the next two years, they’re expected to post excellent growth numbers. For example, Fresnillo’s bottom line is forecast to rise by 158% this year and by a further 84% next year. This puts it on a price-to-earnings-growth (PEG) ratio of just 0.4, which indicates a share price recovery is on the cards. And, with Randgold’s earnings expected to rise by 22% next year, its PEG ratio of 1.1 is also highly appealing.

In The Slow Lane

Clearly, not all mining companies have the size, scale and production capabilities of Fresnillo and Randgold, which makes them a less appealing investment for now. Take African Potash (LSE: AFPO) and Beowulf Mining (LSE: BEM) that are a fraction of the size of their two sector peers. Many investors may be bullish on their long term prospects after their share prices have collapsed by 40% and 47%, respectively, since the start of 2013. Yet their appeal for most investors may prove to be limited.

That’s not necessarily because those long term prospects are disappointing, or that their strategies or management teams are poor. It’s merely a reflection of the current state of the mining sector that there are large-cap miners trading at exceptionally low prices and that offer the potential for growing profitability over the short-to-medium term. Furthermore, those large-cap firms offer greater diversity and financial strength than their smaller peers and, as such, appear to offer a more favourable risk/reward opportunity for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »