For many investors in resources stocks, 2015 has thus far been a year to forget. Falling commodity prices, a weak outlook for demand and declining investor sentiment have meant that the share prices of most resources companies have fallen significantly year-to-date.
For example, even though the price of silver has fallen by far less than that of other commodities such as iron ore and oil, silver mining company Hochschild (LSE: HOCH) has posted a fall in its share price of 9% since the turn of the year. And, even though its most recent production update showed that the company was on-track to meet its full-year production guidance, it is still expected to post a loss for the full year. That would make it three years in a row of losses and, as a result, it would be of little surprise for investor sentiment to decline further before it improves.
Of course, Hochschild is expected to return to profitability in 2016, with its pretax profit forecast to be around £19m. While this would be a major step in the right direction and could help to stabilise investor sentiment in the stock, Hochschild’s valuation remains difficult to justify. For example, it trades on a forward price to earnings (P/E) ratio of 31.2 and, with the outlook for the mining sector being relatively challenging, its valuation could come under pressure over the medium term.
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Clearly, any investment in the resources sector comes with considerable risk at the present time, since there is a very real threat that further commodity price falls could lie ahead in the short run. However, the risk/reward ratios for Roxi Petroleum (LSE: RXP) and Falkland Oil and Gas (LSE: FOGL) appear to be relatively favourable and, while they are likely to be volatile stocks that are highly dependent upon news flow in the months ahead, their long term potential remains appealing.
For example, Falkland Oil and Gas has considerable potential via a very appealing asset base, with it having a share of what could prove to be a total haul of over 1m barrels of recoverable oil at the Isobel Deep prospect in the North Falkland Basin. Furthermore, it has a relatively sound balance sheet with sufficient cash to progress with its drilling programme and, by spreading the risk with its partners, has been able to produce an even more appealing risk/reward ratio for its investors. Certainly, its share price performance is highly dependent upon future news flow, but as far as smaller exploration companies go, it appears to be among the more appealing.
Similarly, Roxi Petroleum is also a relatively volatile stock, but has delivered a share price rise of 22% since the turn of the year. A key reason for this is encouraging news flow regarding its drilling programme, with the company being able to successfully raise a further $20m during the course of the year via a placing so as to fund future activities.
As a consequence of this fundraising and also the changes made to future royalty payments on its 58% owned BNG asset and the sale of its stake in the Galaz Contract Area, Roxi Petroleum’s long term future appears to be more stable than it was previously. And, while a weak oil price is unlikely to aid its performance, the company seems to be worth buying for the long term.
