Sirius Minerals is up 96% since April but the shares were 182% higher during August. Meanwhile, 88 Energy is down 12% but was 37% higher than April’s 2.58p during August. Such volatility means we can’t rule out a complete reversal of Sirius Mineral’s share price gains since April, as we’ve seen with 88 Energy.

Great potential and zero earnings

Neither firm has posted any earnings yet, but they both have a great story and bags of potential. Early in 2016, 88 Energy and its partner Burgundy Xploration discovered oil in Alaska with their Project Icewine. The discovery was transformational with 88 Energy’s shares rocketing by around 1,200% by March before dropping back to where they were when I wrote about the firm in April. 

Even today the share price is almost 800% higher than it was at the beginning of the year, so that puts the volatility in perspective. I think we should expect an ongoing bumpy ride as the company works to commercialise its discovery. Right now the firm is preparing to drill its second well in the Icewine project financed by an oversubscribed placement during May that raised around $25m before costs by issuing 715 m new shares. On top of that, the company took on a $50m loan agreement with the Bank of America to fund specific projects.

Need for finance

The current low price of oil and the firm’s ongoing need for capital to fund further exploration and development make the outcome for investors uncertain from here, I reckon. A fair amount of the project’s potential must already be realised in 88 Energy’s share price after such large advances.

Big uncertainties revolve around the need for financing at Sirius Minerals, too. The firm aims to become a world-leading multi-nutrient fertiliser producer with its polyhalite mine development project in North Yorkshire. The directors have overcome the planning hurdles but Sirius Minerals now needs to raise billions to build the mine before it can earn a single pound of revenue from mining potash. It’s unclear how the process will unfold for investors from here. The great risk with both of these companies is that cash demands could lead to further share dilution, which could work against investor total returns. 

In both cases, ongoing share price volatility seems assured and I’m reluctant to buy the firms’ shares unless their charts show weakness in the price. For speculative investments like these, one strategy could be to keep positions small relative to the size of a share portfolio, buy only on down days, never average down, and to exercise a lot of patience as the stories play out.

The post Will Sirius Minerals plc plunge like 88 Energy Limited? appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any shares mentioned. 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.

Calling in Doctor Copper

Although Rio Tinto recently earned more than 80% of its profits from producing iron ore the firm has big ideas about expanding its copper operations. In today’s news, Rio Tinto and its partners, the Government of Mongolia and Turquoise Hill Resources, have approved the next stage in the development of the world-class Oyu Tolgoi copper and gold mine in Mongolia.

In a measure of just how long it takes the world of big mining to respond to the outcomes of the supply and demand equation for natural resources, Rio Tinto’s deputy chief executive Jean-Sébastien Jacques said: “Rio Tinto’s partnership with Mongolia began over a decade ago… Today’s investment takes it to another level and will transform Oyu Tolgoi into one of the most significant copper mines globally, unlocking 80% of its value.”

According to the deputy chief, long-term copper fundamentals are strong and the proposed ramp-up in production from Oyu Tolgoi will commence just as many expect copper markets to face a structural deficit.

That’s interesting because one old market saw is that ‘Doctor Copper’ has a PhD in economics due to its apparent ability to predict turning points in the global economy. The argument goes that copper’s widespread applications in many sectors of the economy, such as in electronics, plumbing and the power industry, make demand for copper a reliable leading indicator of economic health. Some believe rising copper prices suggest strong copper demand and hence a growing global economy while declining copper prices may indicate sluggish demand and an imminent economic slowdown. 

However, the presence of a structural deficit in the copper industry suggests an imbalance such that a shortage of copper production may be driving copper prices rather than the ‘Doctor Copper’ theory that the price of copper indicates the state of things on the demand side of the equation.

Rio Tinto’s three big weaknesses

The price of copper has been sinking for five years or so in line with other commodities but it also participated in the bounceback during early 2016. However, I’m not putting any faith in Doctor Copper’s diagnosis for the economy. I reckon copper, the other commodities, and the share prices of big mining firms such as Rio Tinto could be caught in the currents of a tsunami of speculation, perhaps driven more than ever in today’s world by the masses in China.

Rio Tinto’s three big weaknesses are that:

1) The firm has almost no pricing power for the product it produces

2) Demand is cyclical

3) Costs are volatile.

That’s a poor set of circumstances on which to base any business model and leads to wilder outcomes for investors when those factors are put on steroids with an overdose of speculation.

The post Rio Tinto plc’s 3 Big Weaknesses appeared first on The Twelfth Magpie.

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As such, things could realistically get worse in the coming weeks and months for resource-focused stocks such as BP (LSE: BP) and Cape (LSE: CIU) following their share price falls of 2% and 4%, respectively, since the turn of the year.

However looking a little further ahead, both companies have significant scope for upward reratings – especially since their financial performance is expected to show signs of life in the current year. For example, BP is due to report a rise in its bottom line of 6% in 2016 and yet trades on a very fair price-to-earnings (P/E) ratio of 14.8. Given its high quality asset base and relatively strong financial standing, it would be of little surprise for BP’s rating and profitability to move further upwards as the outlook for the oil price improves in the long run.

Similarly, Cape trades on a P/E ratio of just 8.8 and while its bottom line is expected to fall by 4% in the current year, this would represent a major improvement upon 2015’s expected performance. That’s because Cape is set to report a 12% decline in earnings for last year as a result of highly challenging trading conditions.

Strong income options

As well as the scope for upward reratings, both BP and Cape also offer strong income outlooks. In the case of the former, it presently yields 7.5%, although dividends may be cut since they’re expected to be higher than profit in 2016. Still, BP remains a top notch income stock for the long run. And with Cape yielding 6.3% from a dividend that’s covered 1.8 times by profit (and therefore less likely to be cut), it continues to be a relatively appealing, albeit volatile, income option.

While BP and Cape both have value and income appeal on their own, together they could represent an enticing partnership for investors seeking to gain exposure to the energy industry. That’s because they provide a degree of diversification and differentiation, with BP being a large cap oil and gas play that’s focused on production and Cape being an industrial services provider that focuses on maintaining assets in the energy and resources sector throughout their lifecycle.

Clearly, Cape is dependent upon the success and profitability of the resources sector, while BP depends on the oil price in the long run in order to grow its profitability. Therefore, neither stock is immune from further oil price falls, but with their shares outperforming the wider index and many of their sector peers already in 2016, now could prove to be an opportune moment to buy a slice of both of them.

The post BP plc And Cape PLC: The Perfect Resources Partnership? appeared first on The Twelfth Magpie.

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Take small-cap platinum miner Lonmin (LSE: LMI), for example. The plunging price of platinum has seen profits evaporate, losses mount and the share price run itself into the ground. The final nail in the coffin for existing shareholders was a net $370 million rights issue designed to represent around 98% of the enlarged firm’s issued share capital — I think it’s fair to say that 2015 wasn’t the best of years for Lonmin or its shareholders.

Is the worst behind Lonmin?

Does this situation make your contrarian antennae twitch though? Not mine, but it does make my barge pole wobble. The old Lonmin is effectively dead and buried. This new capital injection means that whatever plans the firm has from here will ‘benefit’ those that chose to reinvest in the firm rather than those that didn’t.

The investing catastrophe that is Lonmin underlines just how fragile a firm’s business model can be in the resources sector. If you were contemplating starting a business from scratch, would you agree to these terms for the business model?

1. The business must be capital-intensive.

2. You will not be allowed to set your own price for your product.

That doesn’t seem attractive. In fact, it seems downright risky.

I have no conviction or confidence that the price of platinum will rise or remain at an economically viable level for Lonmin’s trading, so I’m avoiding the shares.

A far superior business

I’m more attracted to FTSE 250 constituent DCC (LSE: DCC), which is an international sales, marketing, distribution and business support services firm. Unlike Lonmin, DCC enjoyed a cracking 2015 with a double-digit uplift in earnings and a share price that shot up by 60%.

Last year, DCC earned around 54% of its operating profit transporting oil and liquefied petroleum products. However, that’s not the only string to the firm’s bow. Around 22% of operating profit came from technology products, 18% from healthcare and 6% from a range of recycling, waste management and resource recovery services.

DCC strikes me as a firm that rolls its sleeves up and does the things that people need done — for a price, of course. And it’s a price that DCC determines itself. On that basis, DCC’s business model is far superior to Lonmin’s and that happy situation shows up in the financial results DCC achieves:

Revenue growth produces rising cash flow, which is what really matters with a growing business. The profits produced enjoy good support from all that generated cash, which is a major sign of a strong business.

At today’s 5650p share price, we can pick up DCC shares on a forward price-to-earnings ratio of just over 20 for year to March 2017. Meanwhile there’s a forward dividend yield of 1.9% with the payout covered 2.6 times by forward earnings, which City analysts expect to rise 11% that year.

I’d rather take my chances with DCC than with Lonmin, and I think there’s a good chance the firm’s superior business model could outperform Lonmin’s in the longer term and perhaps during 2016, too.

The post How DCC plc Could Beat Lonmin plc In 2016 appeared first on The Twelfth Magpie.

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Diversified resource producer and marketing operation Glencore (LSE: GLEN), for example, has seen its share price plummet around 80% this year. If the share price can recover some of that previous ground, investors taking the plunge now could do very well.

Doing a lot of things right

When commodity price falls began to bite, Glencore found its high debt load problematic. However, the firm was quick to act with a placing in September to help pay some of the borrowings off. On top of that, the company reduced some of its zinc production to preserve resources in the ground until prices improve, and plans to sell off some of its copper mines to raise more cash. The firm appears to be doing a lot of things right if it is to survive the current harsh trading environment.

In a recent trading update, Glencore said it is targeting debt reduction that will take its borrowings down to $18bn to $19bn by the end of 2016. Citing free cash flow of £2bn, Glencore thinks the debt is manageable and argues that it is well prepared for current or even lower commodity prices. The directors point to the firm’s marketing operation, which they say is a low risk defensive earnings driver, and it’s something that the other big diversified miners on the London stock market don’t usually have.

Maybe Glencore is in no immediate danger of going bust, but I’m holding back on investing because the shares still seem to be falling. I want evidence that the slide has reversed or at least halted before I’ll even think about piling into the shares.

A ‘hidden’ growth driver

I’m more attracted to Ftse Small Cap firm McBride (LSE: MCB), which is a private label household and personal care products provider. Although the firm’s core business is to make products for retailers to sell under their own brand names, there is an interesting potential growth driver ‘hidden’ within the firm’s operations.

Indeed, McBride has a growing portfolio of its own successful brands within its Household and Personal Care categories. The firm reckons its own brands — names such as Gentelle, Ovenpride, Limlite, Surcare and Aveva — make a significant contribution to profits. The directors see a particular opportunity because McBride’s own brands are important in emerging markets where private label is in its infancy.

In contrast to Glencore’s travails, we’ve seen McBride’s shares rise by more than 80% during 2015, and I think there could be more to come next year. City analysts following the firm expect earnings to put on 19% year to June 2016, and the current 146p share price means the company trades with forward price-to-earnings ratio around 15. McBride seems well worth further research and I reckon it could beat Glencore on total investor returns during 2016.

The post How McBride plc Can Beat Glencore plc In 2016 appeared first on The Twelfth Magpie.

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The market price of iron ore plunged from a peak of around $187 per metric ton in February 2011 to today’s figure around $53 — a 72% fall.

Holding on

Rio Tinto is fighting back. In the good times of high commodity prices costs escalated due to supply and demand — the big miners wanted labour, machinery, equipment energy and other resources, so the price of those things went up in such a buoyant market. So to counter falling revenues, Rio Tinto has been pushing costs back down and increasing its operational efficiency for several years.

The firm is also ramping up production in a dash for market share. With these lower iron ore prices, that boils down to working harder for less. However, Rio has some producing mines with production costs less than half today’s iron ore market price and the firm reckons it can ride out the downward lurch of the price cycle. So far, Rio Tinto is keeping positive cash flow coming in, albeit at a reduced level.

The chart for iron ore shows that the price has not fallen beyond the low of around $50 it hit in April, so has the base metal found a floor? Maybe, but I wouldn’t count on it. The big worry I have with iron ore is the price history.

Just another bubble

On the price chart for iron ore over a 30-year period the high prices of the last ten years look like a bubble. For almost 20 years from 1985, iron ore traded in a range between about $12 and $15 dollars per metric ton. Then we saw the big bubble in the price, which peaked at about $187 in February 2011.

Today’s $53 or so is still almost twice the $28 iron ore stood at ten years ago in December 2005, and around four times the $13 or so from December 2002. To me, that price history means there is a lot of potential for iron ore to revert to the mean from here and, in that context, a halving of the price of iron ore does not seem like a wild expectation.

Still increasing the dividend

Meanwhile, Rio Tinto keeps up its progressive dividend policy. In August, the firm’s interim results revealed underlying earnings down (43%) compared to the equivalent period the year before, net cash from operations down (19%), but the firm lifted the dividend by 12%.

Earnings used to cover the dividend payout almost seven times in 2010, but 2016’s projected earnings will only cover the forward dividend once.  If iron ore falls further, it will affect Rio’s cash flow and earnings further, and the directors will likely reduce the dividend. It’s hard to imagine Rio Tinto’s share price holding up if the directors start slashing the dividend.

It is hard to estimate how far the share price might fall if this downside scenario plays out. However, a natural first stop is the firm’s net asset value around £28,976 million. If that figure becomes Rio Tinto’s new market capitalisation, the shares will stand at about 1580p each. In this potential outcome, investors stand to lose both capital and income. Once down, the shares could stay low, perhaps never returning to previous highs. That’s why I’m avoiding Rio Tinto, which I see as a gamble right now.

The post Why Rio Tinto plc Could Plunge To 1,580p appeared first on The Twelfth Magpie.

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Certainly, value investors may be very interested in low valuations, but the challenge lies in assessing which companies are unjustly cheap and which ones are cheap for good reason. In other words, are resources companies such as Gulf Keystone Petroleum (LSE: GKP), Polymetal (LSE: POLY) and Cape (LSE: CIU) value traps or screaming buys?

Cape

With Cape’s shares having fallen by 16% in the last year, its decline is relatively modest compared to some of its sector peers. That’s at least partly because the industrial services provider has been able to maintain growing profitability in the last two years, with 2015’s forecast of an 11% fall in earnings being rather mild versus its sector peers. And, with Cape being expected to deliver a decline in net profit of just 1% next year, it appears to be coping rather well during a period of cutbacks for the energy sector.

As a result, Cape’s price to earnings (P/E) ratio of 8.8 indicates that it offers excellent value for money. Furthermore, a yield of 6% which is covered 1.9 times by profit is not only high but reasonably sustainable. So, while Cape’s share price could realistically fall further in the coming months, for investors looking years ahead it appears to be an excellent buy.

Polymetal

Similarly, precious metals company Polymetal seems to be in a stronger position as a business than its 4% share price fall since the turn of the year suggests. Certainly, the outlook for the price of gold, silver and copper is rather downbeat, but Polymetal’s earnings are due to fall by just 5% this year before rising by 3% next year.

Clearly, neither of these figures is likely to positively catalyse investor sentiment in the company, but a rising gold price could do so. The world economy continues to offer a rather uncertain outlook and, with interest rates set to begin their rise within the next six months, the contraction of global monetary policy may cause a flight to a store of wealth in the form of gold. Therefore, with Polymetal having a P/E ratio of 12.4, its shares appear to be worth buying for the long term.

Gulf Keystone Petroleum

Gulf Keystone Petroleum also offers a wide margin of safety. Its shares trade on a price to book value (P/B) ratio of only 1.2 which, for a company with such an appealing asset base, appears to be very low. The problem, though, is that Gulf Keystone Petroleum may require an even wider margin of safety to make it a strong buy at the present time.

That’s because its finances continue to be in a rather precarious position. Certainly, the receipt of $13m a couple of weeks ago from the Kurdistan Regional Government (KRG) is a positive step which has led Gulf Keystone Petroleum to begin exporting its oil rather than selling it at a lower price on the domestic market. However, there is still little information on whether its debtors will be cleared, as well as uncertainty regarding regular payments. As such, a lower P/B ratio may be needed before investment in case of a placing being required over the medium term.

The post Gulf Keystone Petroleum Limited, Polymetal International PLC And Cape PLC: Value Traps Or Screaming Buys? appeared first on The Twelfth Magpie.

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As such, buying shares in the resources sector right now may well not prove to be a good move for the rest of 2015. The months ahead are likely to include further falls in profit for mining and oil companies but, by investing now, investors could be setting themselves up for stunning gains in the long run.

For example, buying shares in Rio Tinto (LSE: RIO) at the present time will likely mean a tough six months for investors. That’s because the situation in China is unlikely to significantly improve in the next few months and, as such, demand for iron ore is likely to remain subdued for the remainder of 2015. Therefore, Rio Tinto’s bottom line is set to fall by as much as 50% in the current year which, while being priced in by the market, is still likely to cause investor sentiment to wane in the near term.

However, beyond this year, Rio Tinto’s prospects are surprisingly upbeat. For example, it is expected to grow its earnings by 6% next year and, while a dividend cut cannot be ruled out, its shareholder payouts are due to be covered 1.2 times by profit, which indicates that they are sustainable. Therefore, a yield of 6.4% in 2016 could act as a positive catalyst on the company’s share price and help to improve investor sentiment moving forward.

Similarly, copper miner, Antofagasta (LSE: ANTO), is also set to be hit by a major slump in its earnings. Certainly, investors have become somewhat used to falls in the South American company’s earnings, with them falling in each of the last two years. However, if Antofagasta meets current guidance it will mean that the company’s net profit has fallen by 78% in just three years.

Clearly, short-term investors will find Antofagasta hugely unappealing but, with an excellent asset base and an emerging world which is still intent on developing at a rapid rate in future years, Antofagasta remains a company with a bright future. And, with net profit set to rise by 74% next year, a turnaround could occur a lot sooner than the market currently anticipates.

Meanwhile, Tullow Oil (LSE: TLW) is transitioning from explorer to producer, with its bottom line set to rise by 127% next year. This puts it on a price to earnings growth (PEG) ratio of just 0.1 and, with it trading on a price to book value (P/B) ratio of 0.66, it appears to be all set for an upward rerating in the long run.

Of course, the price of oil is now set to remain at sub-$50 over the medium term. That is, according to industry experts; many of whom were predicting $150+ oil just eighteen months ago. Clearly, the price of black gold is highly volatile and exceptionally unpredictable. For investors, then, this creates an opportunity to benefit by simply buying major oil companies while they are cheap and offer upbeat near term prospects. And, on this front, Tullow Oil seems to fit the bill perfectly.

The post 3 Super Resources Stocks To Buy Right Now: Rio Tinto plc, Tullow Oil plc And Antofagasta plc appeared first on The Twelfth Magpie.

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However, generalising can be dangerous since there are nearly always exceptions to the rule. As such, the resources sector, while enduring a very challenging period at the present time, could contain a number of companies that are not only worth investing it, but could deliver exceptional returns.

One such example is Genel Energy (LSE: GENL). Looking at its track record would be unlikely to cause many investors to buy a slice of the business since, in the last four years, it has been loss-making in two of them. And, with losses equating to £204m last year (versus a pretax profit of £122m in the previous year), it is clear that Genel is struggling to perform during the low oil price environment.

However, this look set to change. That’s because the company’s operations remain relatively robust (especially considering how closely located it is to the conflict in Iraq/Kurdistan) and, with the Kurdistan Regional Government (KRG) recently announcing a regular payment plan for producers in the region, investor sentiment could begin to pick up as Genel’s financial outlook starts to improve.

On this front, Genel is expected to post a pretax profit in each of the next two years, with £39m and £50m being forecast respectively at the present time. Certainly, these figures are considerably lower than the loss posted last year but, crucially, they show that Genel is able to cope with the dual challenges of a low oil price environment and political instability in the region in which it operates. And, with it having a price to book (P/B) ratio of 0.37, its margin of safety seems to be exceptionally wide and highly enticing for potential investors.

Similarly, Exillon Energy (LSE: EXI) may appear to be a stock worth avoiding right now. After all, its share price has fallen by 24% this year, which indicates that other investors are bearish on its prospects. However, the company has remained profitable throughout the current low oil price environment and, with it having a very lucrative asset base in Russia, is expected to continue to post upbeat profitability in each of the next two years.

In fact, Exillon Energy’s net profit is forecast to rise by 34% this year, and by a further 24% next year. These expectations mean that Exillon Energy trades on a price to earnings growth (PEG) ratio of just 0.1, which indicates that its shares are worth buying at the present time. And, with August’s production numbers breaking three consecutive months of declines, Exillon Energy’s share price may benefit from improving investor sentiment moving forward.

Similarly, engineering company Plexus (LSE: POS) also appears to offer excellent value for money – especially when its track record of growth is taken into account. For example, during the last four years it has been profitable throughout and has posted annualised earnings growth of over 61% during the period. Certainly, growth is due to disappoint this year, with it set to drop to just 5%, before rebounding next year with a figure of 44%.

And, while Plexus trades on a price to earnings (P/E) ratio of 33, its price to earnings growth (PEG) ratio of 0.5 indicates that now is a great time to buy a slice of the business.

The post Are Genel Energy PLC, Exillon Energy Plc And Plexus Holdings PLC 3 Resources Stocks To Buy Right Now? appeared first on The Twelfth Magpie.

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As a result, many investors are steering clear of the sector due to the great amount of uncertainty that is currently present. However, this may not prove to be the right strategy to adopt, since with ultra-low valuations on offer, there is the potential to generate significant profit in the long run for investors that can live with relatively high levels of volatility.

Of course, a simple way to reduce risk and increase potential returns is to demand a high margin of safety before purchasing a resources company. Certainly, a margin of safety is always a good idea but, with the future for the industry being so uncertain, simply increasing its required level seems to be a prudent means of making profit a more likely outcome than a loss.

One stock which has a very wide margin of safety at the present time is Genel Energy (LSE: GENL). It operates in Iraq/Kurdistan, and so requires an even wider margin of safety than a resources company located in more a more stable environment, owing to the conflict that is ongoing in the region. And, with Genel’s share price having fallen by over 50% this year, investors are pricing in challenges for the company over the short to medium term.

However, Genel still trades on a price to earnings (P/E) ratio of 20.5, which is hardly dirt cheap. Its forecasts, though, indicate that such a rating is rather low, given that the company is expected to return to profitability this year and then deliver a rise in earnings of 58% next year. Furthermore, with Genel having a price to book (P/B) ratio of just 0.4, its shares appear to have limited risk and vast potential rewards.

Similarly, copper miner Antofagasta (LSE: ANTO) may at first appear to be rather overpriced. After all, it has a P/E ratio of 29 which, when it is considered that its sales are expected to slump from £3.5bn last year to £2.7bn in the current year, seems to be rather rich. However, while this year is set to be disappointing, next year is due to be much, much better since top line growth of 21% is currently being pencilled in by the market. This should translate into earnings growth of 76%, which puts Antofagasta on a price to earnings growth (PEG) ratio of just 0.2.

Meanwhile, North Sea oil producer Enquest (LSE: ENQ) recently reported a challenging set of results. Although its production increased by over 17% in the first six months of the year, its revenue fell by almost 12% versus the same period last year and, as a result, its earnings look set to decline heavily in the current year before moving into loss-making territory next year.

Clearly, Enquest is suffering from a lower oil price, but is also not aided by its exposure to the traditionally higher cost region of the North Sea. And, with costs becoming an increasingly important factor as margins across the industry come under pressure, this looks set to count against it over the medium term. As such, it appears to be worth watching, but not investing in, at the present time.

The post Genel Energy PLC, Enquest Plc & Antofagasta plc: 3 Resources Stocks Set To Shine? appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any shares mentioned. 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.