Will Glencore PLC, Cairn Energy PLC And Hochschild Mining Plc Enhance Your Returns In 2016?

Should you buy these 3 resources stocks? Glencore PLC (LON: GLEN), Cairn Energy PLC (LON: CNE) and Hochschild Mining Plc (LON: HOC).

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Shares in oil and gas exploration and development company Cairn Energy (LSE: CNE) were given a boost today with the release of an upbeat update.

Importantly, it states that Cairn remains fully funded from existing financial resources to deliver its exploration and appraisal programme. Furthermore, it’s on track to take its North Sea developments through to free cash flow generation next year and with Cairn having a net cash position of $603m, it appears to be relatively financially sound.

With Cairn reporting positive flow tests on the SNE-2 appraisal well in Senegal that highlighted its commercial deliverability, it has now commenced drilling operations on the next appraisal well, SNE-3. Looking ahead, Cairn expects its development expenditure to be predominantly focused on its key assets in Senegal, with $492m being earmarked for spending across its asset base in 2016 and 2017.

Meanwhile, Cairn states in today’s update that it has a high level of confidence in the outcome of its tax dispute with the Indian government. Clearly, there’s no guarantee of a positive result in this regard and with the Indian government demanding $1.6bn plus interest and penalties, it remains a risk to Cairn’s future outlook.

With Cairn trading on a price-to-book-value (P/B) ratio of just 0.45 and having a relatively sound balance sheet, it does have appeal for long-term investors. However, with further losses due in the next two years and a number of other resources stocks being cheap and profitable, there appear to be better options available elsewhere.

Silver slump

It’s a similar story for silver miner Hochschild (LSE: HOC). It’s due to post its third year in a row of losses when it reports on its 2015 financial performance, with the slump in the price of silver being a key reason behind this. Clearly, resources companies such as Hochschild are highly dependent on the price of their respective commodities, but a number of other silver mining companies have remained profitable in recent years.

Certainly, Hochschild is expected to deliver much-improved performance in 2016, with the company due to record earnings per share (EPS) of 1.3p for the full year. However, with its shares trading on a forward price-to-earnings (P/E) ratio of 31, this improved performance already appears to be reflected in Hochschild’s valuation.

Volatility ahead

Also struggling to cope with lower commodity prices is Glencore (LSE: GLEN). In response to declining investor sentiment and a worsening operating environment, it conducted a fundraising towards the end of 2015 that reduced its degree of balance sheet leverage. Furthermore, Glencore implemented strategy changes in order to become more efficient and more financially stable after declining investor sentiment led to a collapse in its share price of 70% in 2015.

Undoubtedly, Glencore remains a highly volatile and relatively high-risk stock. However, with its trading division performing relatively well and its new strategy having the potential to improve investor sentiment, it may be of interest to less risk-averse investors. This is backed up by Glencore’s forecast earnings growth rate for 2016, which stands at 19% and, while such expectations can be downgraded, a price-to-earnings growth (PEG) ratio of 0.8 indicates that Glencore’s shares offer a relatively wide margin of safety.

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.

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