Are South32 Ltd, KAZ Minerals PLC And UK Oil & Gas Investments PLC 3 'Must-Have' Resources Stocks?

Photo: KAZ Minerals. Fair Use.

Despite posting a large loss in its half-year results (released today), shares in mining company South32(LSE: S32) have risen by around 5%.

Severe cuts

That's mostly because the company has also announced a major restructuring programme that has the potential to improve its long term financial outlook. It will include severe cuts in sustaining capital expenditure at a handful of its operations, with over 1000 jobs also due to be cut as it seeks to offset falls in sales resulting from low commodity prices. It will also seek to make productivity improvements and generate greater efficiencies, although its future remains highly dependent upon commodity prices.

With South32 trading on a price to earnings growth (PEG) ratio of 0.4, it continues to have capital gain potential. And despite being in the midst of a tough trading period and being forced into making major changes to its strategy, it remains a company which could be of great interest to less risk averse investors.

Considerable rewards

Clearly, a turnaround is very achievable, as shown by KAZ Minerals(LSE: KAZ) which released its 2015 results today. Despite experiencing a fall in revenue versus the prior year, KAZ Minerals was able to move from a red bottom line in 2014 to a black one in 2015. This was largely because of a fall in impairments, but also because the company's drive to cut costs has been relatively successful.

Looking ahead, KAZ Minerals is aiming to become increasingly efficient and is also targeting production growth of 50% per year over the next three years. This could have a very positive impact on its profitability, with the copper miner expected to record a pre-tax profit of around £65m in the 2017 financial year.

Although this puts it on a rather rich forward price to earnings (P/E) ratio of 20.4, there is scope for share price gains over the medium to long term. That's because, with production rising and costs having the potential to fall, KAZ Minerals could begin to deliver on its turnaround potential in the coming years.

Clearly, the company remains a relatively high risk play and continues to have rather high debt levels. But for investors who are comfortable with a relatively high level of risk, the rewards from investing in KAZ Minerals could be considerable.

Risky potential

Meanwhile, UK Oil & Gas(LSE: UKOG) continues to lead most of its resources peers when it comes to year-to-date share price growth. It is now up by 100% since the turn of the year as a result of positive news flow regarding the Horse Hill prospect near Gatwick airport, with its 20% stake in the project benefitting from the better than expected flow rates.

Looking ahead, there is the potential for further upbeat news flow from Horse Hill, although investing in UK Oil & Gas at the present time may be rather risky. That's because it is impossible to determine the nature of future news, and there could be disappointments ahead, as well as more encouraging news.

Therefore, while less risk averse investors may be keen to invest in UK Oil & Gas, for most investors buying a slice of a less volatile business within the oil and gas sector may offer a more preferable risk/reward opportunity.

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Peter Stephens owns shares of KAZ Minerals and South32. 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.

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