The natural resources sector has always been a relatively risky industry in which to invest. Commodity prices are rarely stable for long, and this can mean somewhat volatile share prices for companies operating within the sector. Accordingly, a wide margin of safety seems to be necessary before buying natural resources stocks. Do these two shares offer valuations which are enticing enough to merit purchase at the present time?
Improving performance
Reporting on Tuesday was Oil & Gas exploration and production company Nostrum (LSE: NOG). It made steady progress in an operational capacity, with average production of 48,743 barrels of oil equivalent per day (boepd). With oil prices averaging over $50 per barrel in the first quarter of the year, this means revenues have risen to in excess of $110m. This is substantially higher than the $73.9m from the first quarter of the previous year.
Nostrum expects to reduce its exported crude oil transportation costs in the coming weeks due to the KTO pipeline connection almost being complete. It is also making steady progress on construction of the third unit of the Gas Treatment Facility, which could help to lift investor sentiment over the short run.
Looking ahead, Nostrum is forecast to move from loss into profit in the current year. It is then expected to record a rise in its bottom line of 212% next year. This puts it on a forward price-to-earnings (P/E) ratio of just 8.1, which indicates that it offers excellent value for money. Certainly, there is scope for volatility in the price of oil during the coming months, but with a wide margin of safety Nostrum seems to be a worthwhile investment opportunity.
Low valuation
The investment prospects for China-focused zinc/gold mine developer Griffin Mining (LSE: GFM) could also be relatively bright. While it lacks the size and scale of other resources companies and therefore may be relatively high risk, its low valuation indicates that now could be the right time to buy for the long run.
Despite having risen by over 100% in the last year, the company’s shares continue to trade on a relatively enticing valuation. A P/E ratio of just 7.7 indicates that they have a wide margin of safety which could help to make up for their lack of regional diversity when compared to other natural resources stocks.
Griffin Mining may not have a diversified asset base, but its focus on developing a mine with gold, lead, zinc and silver deposits means it has at least some diversity. Precious metals in particular could perform relatively well this year if, as expected, inflation in the US increases and causes global inflation levels to rise. Griffin Mining could benefit from this, as well as the potential for higher uncertainty from mounting political risks in Europe. Therefore, while a relatively high risk, it could be worthy of a closer look for less risk-averse investors.
