The resources sector is a difficult place in which to invest at the present time. Thats at least partly because there is a real risk that an investment made now may fall in value in the coming weeks and months, thereby making an investor feel disappointed with their purchase.
However, investing in the sector now could also prove to be a sound long term move even if, in the short run, it leads to major disappointment. Thats because the valuations on offer within the industry are exceptionally low and, in some cases, equate to a sizeable margin of safety.
For example, Randgold Resources (LSE: RRS) trades on a price to earnings growth (PEG) ratio of just 1.2, which indicates that its shares are a strong buy at the present time. Clearly, in the short run the companys share price fall of 15% in the last six months may continue since Randgold is forecast to post a fall in its bottom line of 20% in the current year. However, investor sentiment could pick up over the medium term, since a rise in earnings of 22% is pencilled in for next year, which has the potential to lift the companys share price.
Clearly, the price of gold has hurt Randgolds profitability, with it falling to a five-year low earlier this year. However, with the economic and political outlook for the world being relatively uncertain, gold may become increasingly popular as a store of wealth and this may have a positive impact on Randgolds financial performance.
Also having a bottom line which is under pressure is BHP Billiton (LSE: BLT). Its earnings are due to fall by 54% in the current year and this could have a negative impact on the companys share price in the short run. Thats especially the case since even after BHPs shares have fallen by 45% in the last year they still trade on a forward price to earnings (P/E) ratio of 23.6.
In the long run, though, BHP has huge growth potential. Thats because it is in the process of reorganising its business so as to concentrate on generating efficiencies and lowering its cost curve. And, at a time when many of its sector peers are enduring severe financial difficulties, BHPs relatively strong balance sheet is likely to mean that it not only emerges from the current commodity crisis, but does so in a stronger position relative to its peers. As such, it appears to be a sound long term buy.
Meanwhile, IGAS (LSE: IGAS) has today released a disappointing set of results, with the onshore gas company moving into a loss-making position in the first half of the year. The reason for this is a declining oil price which contributed to impairment charges of 10.1m, write-offs of 5.1m and goodwill charges of 14.5m. As such, IGASs pretax loss totalled over 30m.
Looking ahead, more challenges could be on the horizon since the price of oil may fall further. However, with IGAS now having completed its cost reduction programme, it appears to be in better shape since its unit cost has fallen from $38 per barrel to $31 per barrel. And, with IGAS trading on a PEG ratio of just 0.1 as it is forecast to move back into profitability next year, it could prove to be a profitable, albeit very risky, purchase at the present time.
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Peter Stephens owns shares of BHP Billiton. 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.
