Life as an investor is challenging at the present time. That’s because the outlook for the Australian economy has been disappointing for most of 2015, with a recession apparently being on the cards. However, GDP figures for the September quarter beat expectations and show that the economy is performing relatively well even with the resources sector continuing to struggle. As a result, it is difficult to know whether to buy, sell or do nothing. However, one aspect of great interest to investors is the potential for improved performance from the mining sector over the long run. In other words, while…
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Life as an investor is challenging at the present time. That’s because the outlook for the Australian economy has been disappointing for most of 2015, with a recession apparently being on the cards. However, GDP figures for the September quarter beat expectations and show that the economy is performing relatively well even with the resources sector continuing to struggle.
As a result, it is difficult to know whether to buy, sell or do nothing. However, one aspect of great interest to investors is the potential for improved performance from the mining sector over the long run. In other words, while the short term could be tough, a number of mining companies are positioning themselves to deliver growing profitability over the medium term.
One notable example is BHP Billiton Limited (ASX: BHP). It has endured a very challenging recent period, with the tragic events at its 50% owned Samarco mine in Brazil potentially leading to the company being sued for $7.2bn. This, plus plunging commodity prices for oil and iron ore have left the company’s share price trading at a ten-year low.
This, though, could present an opportunity for less risk averse investors to buy a slice of the business. After all, historically the best time to buy any stock is when ‘blood is running in the streets’. In the long run, BHP’s strategy changes could have a positive impact on its financial performance, with the company likely to become more efficient having spun-off its non-core assets and also being focused on reducing its cost base. This has potential to further squeeze BHP’s competitors and could lead to a relatively strong position for the company in the long run.
In addition, with BHP reducing its net debt levels by US$1.4bn to US$24.4bn in its most recent financial year and having free cash flow of US$6.3bn in the 2015 financial year, it appears to have sufficient financial standing to emerge from the current commodity rout. And, with a price to book value (P/B) ratio of 1.15 versus 1.23 for the ASX, it appears to offer good relative value for money.
Meanwhile, the price of gold has also disappointed this year, with it hitting a five-year low. As a result of this, Newcrest Mining Limited (ASX: NCM) is expected to post a fall in its bottom line of 29% in the current year. This has clearly hurt investor sentiment, with the company’s share price declining by 26% in the last six weeks.
However, looking ahead to next year Newcrest is expected to report a rise in net profit of 15% and this has the potential to catalyse investor sentiment. And, with Newcrest’s shares having a P/B ratio of 0.98, there appears to be substantial upward rerating potential.
Moreover, Newcrest is now a far more efficient business than it was a few years ago, with the company having implemented major changes as it sought to reduce its cost base in the face of a lacklustre gold price. This included significant job cuts and, having been through the process of becoming more efficient, Newcrest seems to be well-positioned to prosper over the medium term.
Of course, the price of gold could come under additional pressure in 2016 and beyond since US interest rate rises are firmly on the horizon. But, on the other hand, uncertainty regarding the global economy could keep the precious metal’s valuation relatively buoyant, thereby providing a boost for gold producers such as Newcrest. Due to its efficient business model and low valuation (as well as next year’s positive forecasts), now appears to be a sound moment to buy a slice of Newcrest for the long haul.
Despite this, there is another ASX stock that I believe could outperform Newcrest and BHP.
In fact, it's recently been named as The Motley Fool's Top Stock For 2015 and could make a real impact on your bottom line as we move through the year. As a result, it's well worth finding out more about it.
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Motley Fool contributor Peter Stephens owns shares in BHP Billiton. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.