We’re looking at a 35% climb so far in 2018, though the price chart again shows what seems to be ubiquitous behaviour for growth shares — a massive spike on good news, followed by a gradual fall as reality sets in. If you follow a general rule that says “after you see a share spike rapidly, don’t buy,” you might miss the occasional bargain, but I reckon you’d save a lot of money (and heartache) overall.

Precious stuff

Anyway, lithium is a very desirable commodity, being the stuff that in-demand batteries depend on, and Savannah has just announced a big jump in estimates for how much of it there is at its Mina do Barroso project. It’s apparently Western Europe’s largest known spodumene lithium deposit (with spodumene being lithium aluminium inosilicate).

With estimates up by 44%, the company reckons on having around 20.1 million tonnes of it at 1.04% lithium. That’s the equivalent of 209,000 tonnes of Lithium Oxide (Li₂O).

Cash?

A downside of an investment in Savannah Resources, in common with many resource exploration companies, is lack of profitability — forecasts for 2018 and 2019 suggest two more years of losses. But the firm enjoyed a successful £11.5m placing in July, which was followed by major shareholder Al Marjan Ltd shelling out £1m for some additional shares.

It’s a high-risk investment, but one that I think has a decent chance. But beware of previous false starts — the price is still below an earlier spike in 2014.

Recovery

I’ve long seen Petrofac (LSE: PFC) as a tempting recovery prospect, thinking that a sustained oil price recovery could see the firm’s fortunes turn back up. The services the company provides to the oil industry have been under severe pressure as the sector had slashed non-essential spending, with outsourcing taking a lot of that hit.

The big question for many was when things would start to turn upwards, but I’ve never been one for trying to time the market. A stable oil price, I think, was the needed trigger, and it’s starting to look like that’s what we’re getting.

From a 2018 low in early February, the Petrofac share price has gained 45%. And even after that, the shares are trading on a lowly P/E multiple of less than nine based on current forecasts. On top of that, dividends for this year and next are expected to yield around 5%, even after the payout was cut by almost half in 2017.

Organic growth

First-half results in August showed the firm pursuing “organic growth as the market recovers.” That was on the same day we heard of a new $600m contract in Algeria, taking new orders for the year to August up to $3.3bn.

Petrofac still has the weight of an SFO investigation bearing on its shoulders, but I really see the pessimism as being already factored-in to the share price. It’s probably being held back by small EPS falls forecast for this year and next too, but that’s after a very big earnings recovery.

Petrofac looks like a solid recovery buy to me right now, and it might get some of my next pension investment cash.

The post Could this high-flying growth stock smash the Petrofac share price in 2018? appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Are they right?

Strategy

The iron ore producer is teaming up with Savannah Resources (+80% in early trade) in Mozambique, it emerged today.

Unsurprisingly, Rio’s stock was flat following the announcement.

The deal is not a game-changer for Rio, of course, but there remains a doubt that its shares may deserve the attention of value investors right now — at least its depressed valuation may suggest so. 

Rio Tinto’s iron ore strategy has backfired so far — the same holds true for BHP Billiton — but management is only partly to blame for a very poor performance in recent times. After all, even Glencore, whose management has often accused both rivals of little understanding of certain basic market dynamics concerning supply and demand, has struggled over the last 12 months. 

Landscape 

At Rio and its rivals, operational hurdles have come at a time when downwards pressure on most commodities has emerged as the inevitable price to pay for a global slowdown and a shaky recovery whose prospects are highly uncertain, given that nobody can firmly assess whether the growth rate of Chinese GDP is sustainable at 7% a year. 

Signs of stress are apparent, and combine with lofty valuations in other cyclical sectors. 

As expected, the CRB Commodity Index — a commodity futures price index that is useful to determine at which point in the commodity cycle we stand — still trades at multi-year lows.  

A tough trading environment means that Rio’s strategy may take many years to pay off, or it could just be plainly wrong.

Valuation 

Like disposals, targeted joint ventures could be the way forward… although one of the most appealing features of Rio could be a takeover by Glencore, which was rejected in October. A tie-up would make a lot of sense right now — but that’s not enough to buy Rio stock, I’d argue. 

In research published earlier this month, analysts at commodity house Royal Bank Of Canada (RBC) argued that applying “a 1.0x (8%) P/NAV multiple and a 13.0x multiple to our 2016E EPS forecast, we arrive at our price target of £27/share“.

RBC’s estimates are broadly in line with the average price target from brokers, according to Thomson Reuters. Rio’s shares currently trade at 2,700p, which is not far off their five-year lows (and is some 40% below their post-crisis highs). 

Consensus estimates have fallen by 26% over the last 12 months: I doubt they have bottomed out. 

“It is important to note that the NAV and EPS multiples could improve when commodity markets improve and Rio Tinto can progress further in advancing its growth projects and enhancing the returns in underperforming assets. In our view, management success here should lead to multiple expansion relative to its peer group,” RBC analysts opined. 

So, Rio Tinto remains a ‘cyclical macro play’… but one whose declining net debts, reduced capital requirements and cash flow position may be a threat to its dividend yield, which is north of 5% on a forward basis. 

The post Is Rio Tinto plc A High-Risk Trade Following Its Joint-Venture With Savannah Resources Plc? appeared first on The Twelfth Magpie.

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Alessandro Pasetti 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.