The commodity sector is seriously out of favour at the moment but this wont last forever. Could buying at todays prices provide bumper profits in a few years time, and form the basis of a healthy retirement portfolio?
Shares in BHP Billiton have fallen by nearly 10% since last week, when the tailings dam of BHPs jointly owned Samarco iron ore mine in Brazil collapsed, killing at least four people and leaving 20 people missing.
At the moment, efforts are rightly focused on addressing the human tragedy and beginning to understand what went wrong. However, the financial impact of the disaster will also be significant. Estimates of the likely total cost to BHP vary from tens of millions to as much as $1bn.
Iron ore from the mine accounted for around 3% of BHPs underlying operating profit, according to a statement from the firm. The loss of this income means that BHPs free cash flow may not cover its planned dividend this year, forcing the firm to choose between cutting the payout and increasing borrowings.
Despite this, the majority of BHPs assets remain attractive on a long-term basis. At less than 1,000p, I see the shares as a strong buy with good medium-term recovery potential.
Shares in oil and gas group Ophir Energy rose by 6% this morning after the firm said it was in the final stages of signing up future customers for its Fortuna liquefied natural gas (LNG) project in Equatorial Guinea.
Funding for the project is also being developed and is expected to include a mix of equity and debt funding to provide good upside for Ophir shareholders.
In the short-term, there was also good news. Full-year production from Ophirs oil and gas fields in Asia is now expected to be around 12,700 barrels of oil equivalent per day (boepd), up from previous guidance of 11,000-12,500 boepd.
At 100p, Ophir shares trade at a discount of nearly 40% to the firms last reported book value. The firms undeveloped gas assets have the potential to create significant value for shareholders, but a long-term view is likely to be necessary.
Shares in reinforced polymer technology firm Fenner fell by 8% this morning after the firm issued a profit warning for the current year alongside its results from last year.
The big problem for the group is the sustained decline in the US coal industry, which is a major buyer of Fenners heavy duty conveyor belts. Operating profit from Fenners conveyor business fell from 44m to 23.3m last year, despite better results elsewhere.
Fortunately, Fenners other division, Advanced Engineered Products, is doing better. Operating profit fell slightly from 43.6m to 41.0m, due to weakness in the oil and gas industry, but demand from the groups medical and industrial customers remained strong.
Based on todays profit warning, I estimate that Fenners underlying earnings per share are likely to fall to 9-10p next year. A cut to last years 12p dividend payout seems almost certain.
Fenner could be a good recovery play at some point, but now might be too soon to buy, in my view.
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Roland Head owns shares of Fenner and 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.