Shares in iron ore miner Ferrexpo (LSE: FXPO) have slumped by as much as 9% today as the outlook for the commodities sector worsens. That’s despite Ferrexpo releasing a production report today showing 2015 was a record year for the iron ore pellet company. In fact, pellet production in the year increased from 11m tonnes in 2014 to 11.7m tonnes, with a record period being recorded in the final quarter of the year.
But this wasn’t enough to hold off declining investor sentiment, with fears surrounding China and its demand for iron ore dominating investors’ focus. Clearly, the world’s second-largest economy is experiencing a slowdown in its growth rate and with it transitioning from a capital expenditure-led economy to one led by consumer demand and consumer services, demand for the steelmaking ingredient (iron ore) could come under further pressure.
That said, Ferrexpo remains firmly in the black and while net profit is due to fall by as much as 65% in the current year, the company’s valuation appears to take this into account. For example, Ferrexpo trades on a forward price-to-earnings (P/E) ratio of just 4.4, which indicates that the expected decline in its profitability has been priced-in. And with demand for commodities likely to improve in the long run as the emerging world continues to industrialise, Ferrexpo could prove to be a sound buy for less risk-averse investors based on its super-low valuation.
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On the up?
Also trading on a low valuation is Gulf Marine Services (LSE: GMS). It has a P/E ratio of just 5.4, with its bottom line due to have fallen by around 28% in the 2015 financial year. But looking ahead to 2016, Gulf Marine Services is forecast to return to positive growth with net profit expected to rise by 14%. This puts it on a price-to-earnings growth (PEG) ratio of only 0.4, which indicates that its shares could begin to rise following their decline of 21% in the last three months.
Although a continued low oil price could have a negative impact on the renewal of Gulf Marine Services’ contracts, the company’s shift from focusing on capex activities to maintenance spend could help to shield it from the most challenging effects of the low oil price environment. And with a healthy order book and new debt facility, it could prove to be a sound long-term buy.
Tougher year ahead?
Of course, not all resources companies endured a disappointing 2015. Sirius Minerals (LSE: SXX) posted a capital gain of 40% in 2015 as it benefitted from strong news flow. This boosted investor sentiment, with the permissions to build a potash mine in York and encouraging crop study results highlighting the potential of the polyhalite fertiliser the company aims to produce.
And with agreements to supply the product to multiple companies already in place, the company’s long-term future appears to be bright. However, with financing for the project yet to be completed, potential challenges lie ahead in 2016. That’s especially so since the outlook for the wider commodity sector is relatively downbeat so obtaining finance could be rather difficult.
So while Sirius minerals has bucked the trend in the last year, 2016 could be more sobering for the company and its investors. As such, and with some other resource-focused companies being profitable and trading on low valuations, it may be prudent to look elsewhere rather than pile in to Sirius Minerals for now.
