The idea of investing in the mining sector at the present time may appear to be rather counter-intuitive. Thats because the prices of a wide range of commodities are offering little in the way of bright future prospects, with the profitability of a great number of mining companies expected to fall in the current year. As such, investor sentiment in the sector and its constituents could realistically worsen in the short run.
Stunning rewards
However, for long term investors there is a significant opportunity to benefit from low valuations, weak investor sentiment and the worst trading conditions for many years. Certainly, a number of mining stocks are struggling, and offer limited diversification alongside relatively high risks. But the rewards on offer could be stunning.
Take, for example, Centamin (LSE: CEY). It is a gold producer thats forecast to report a fall in net profit of 41% in the current year, which is at least partly because of gold hitting a five-year low earlier in the year.
Looking ahead, though, Centamins profit is likely to rise significantly over the medium term and evidence of this can be seen in its earnings forecast for next year, when the company is due to post a rise in its bottom line of 13%. A key reason for this is increased production levels, with the company reporting that it is on-track to reach 500,000 ounces of gold production by 2017. As a result, now could be the perfect time to buy Centamin, with its shares trading on a forward price to earnings (P/E) ratio of just 11.8.
Substantial growth potential
Another mining company which is increasing production is Rio Tinto (LSE: RIO). It has suffered from the fall in demand for steel, which has caused the iron ore price to drop to a ten-year low. As such, Rio Tintos bottom line is expected to decline by 48% in the current year followed by a further fall of 8% next year.
However, Rio Tintos planned cost savings plus production increases have the potential to not only return the company to positive profit growth over the medium term, but also to strengthen its position relative to its sector peers. Thats because few iron ore miners can compete on costs and, with Rio Tintos market share likely to rise as it becomes less economical for its smaller peers to mine the steel-making ingredient, its long term profitability offers substantial growth potential.
Meanwhile, the worlds largest silver producer Fresnillo (LSE: FRES) has posted three consecutive years of earnings declines as a result of the silver price collapse during the period. In fact, Fresnillos net profit last year was just 7% of its 2011 level on a per share basis, which is a key reason why the companys shares have performed so poorly, with them being down by 51% since the start of 2013.
Looking ahead, though, Fresnillo is forecast to increase its earnings by 130% this year and by a further 102% next year. This appears to justify its rather heady rating of 68.3 and puts the company on a price to earnings growth (PEG) ratio of 0.3. This indicates that considerable share price growth lies ahead, which means that Fresnillo could be worth buying right now.
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Peter Stephens owns shares of Centamin and Rio Tinto. 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.
