The mining sector may appear to be a rather undesirable place in which to invest your hard-earned cash. On the one hand, this is a valid argument since the sector is in the midst of its worst period in living memory. Share prices across the industry are falling as a result of declining profitability which has been spurred on by commodity price crashes.
On the other hand, though, buying at the bleakest possible moments can prove to be a very sound investment strategy. Certainly, it means running the risk of great pain in the short run via continued losses, but in the medium to long term the valuations on offer in the mining sector could be the catalyst for share price growth.
For example, Anglo American (LSE: AAL) now trades on a price to book value (P/B) ratio of only 0.35. This indicates that its shares offer a significant margin of safety so that even if there are major asset writedowns and the companys bottom line remains deep in the red, its shares could still perform well in the long run.
Of course, a rise in the price of platinum and other commodities would be a significant help for Anglo American. Although future prices for any commodity are a known unknown, it seems likely that the price of platinum will gradually recover since supply is due to be constrained and the sale of diesel cars (for which platinum is an important component) is likely to remain high even after the Volkswagen scandal. Furthermore, with Anglo American focusing on core assets and selling off assets which it feels do not offer an appealing risk/reward ratio, it could prove to be a very appealing, albeit volatile, long term investment.
Similarly, gold miner Centamin (LSE: CEY) has been hit hard by the falling price of gold. In fact, gold reached a five-year low earlier this year, but its popularity as a store of wealth could help it to rise if the global economic outlook continues to be highly uncertain.
In addition, Centamin is in the process of increasing production volumes so that over the next couple of years it is likely to deliver much higher levels of profit. For example, next year its bottom line is expected to rise by 22% and, despite this, Centamin trades on a forward price to earnings (P/E) ratio of just 11.1. This indicates that now could be an opportune moment to buy a slice of the business.
Meanwhile, shares in Beowulf Mining (LSE: BEM) have risen by 25% today and this has prompted the company to issue a statement saying that it is unaware of any reason for the significant share price move. This price rise puts the companys shares 203% up over the last year, although trading at around 550p they are still vastly lower than their 7300p peak recorded as recently as 2011.
Certainly, a number of smaller mining companies have considerable long term potential, but for most investors their larger peers seem to make more sense as investments at the present time. Thats because even they are exceptionally volatile, capable of posting major losses but, crucially, tend to be financially more secure, more diversified and arguably better positioned to benefit from any future increase in commodity prices. As such, the likes of Anglo American and Centamin appear to be better buys that Beowulf at the present time.
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Peter Stephens owns shares of Anglo American and Centamin. 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.
