The idea of investing in mining and resources companies is simple. The companies dig up, sometimes refine and sell the ore to both local and international customers. It's a very simple process and you, as the shareholder, benefit from growing production and cashflow.
Unfortunately investors get scared of unpredictable commodities' prices, industry "super cycles" and annual reports whose purpose it seems is to only confuse us more than we already were. Couple in the uncertainty and lack of guarantees in the stock market and you have yourself quite a complex and subjective valuation.
That's why so many brokers and analysts are torn over what stocks are a 'buy' and which are a 'sell'.
However as investors in companies such as Fortescue Metals Group Limited (ASX: FMG) and countless other small miners have witnessed, when you get it right it pays off. Big time. And with a little bit of diversification and research you can uncover some truly hidden gems.
Here are five resources companies which have bright futures, albeit with a little bit of uncertainty.
Beach Energy Limited (ASX: BPT) and Senex Energy Ltd (ASX: SXY) are two oil and gas producers with, literally, barrels of potential. Each operate in the highly prospective Cooper Basin and have Joint Venture (JV) partnerships on projects right around the world with big names like Santos Limited (ASX: STO) and Chevron. As I highlighted here, both are likely to continue growing revenues and production in coming years and will likely appreciate in value.
Sundance Energy Australia Ltd (ASX: SEA) is another prospective oil and gas producer except its flagship assets are located in the United States. It recently recorded a huge increase in reserves following an independent evaluation. It has a healthy cash position and is priced to buy at $0.945.
Rio Tinto Limited (ASX: RIO) is, in my opinion, a possible turnaround story in 2014. After billions of dollars of shareholder destruction following years of write-downs, it appears now could be the time to buy if you're bullish on iron ore demand and growth in China.
Today, Silver Lake Resources Limited. (ASX: SLR) – a gold miner with a number of projects in Western Australia – announced its March quarterly production. After months of share price depreciation (it's dropped from $1.50 to $0.43 in a year!) it appears management has finally made the right decision on the expensive Murchison Gold operation by putting it on care and maintenance. The group's flagship Mount Monger project is continuing to ramp-up production and – pleasingly – management reaffirmed production guidance of between 205,000 and 220,000 ounces of gold in FY14.
Foolish takeaway
Many analysts tipped 2014 to be the year of resources stocks. So far it doesn't appear to be eventuating. Maybe it's because there still isn't enough confidence in the market to spur investment into the sector after years of shareholder destruction and poor commodity prices. However, if 2014 does turn out as planned, keep a close watch on these stocks because they won't last long at current prices.
