Can Anglo American plc, Fresnillo plc and Randgold Resources Limited grow another 50% in the next six months?
The commodity sector is certainly where the action is. Last year, it was mostly the wrong kind of action, as falling metals prices hammered the sector, making natural resources stocks the worst performers in 2015. The excitement has continued this year, but in a good way this time, with the same companies racing ahead of the pack. These three companies have seen their share prices increase around 50% in the last six months alone. What kind of action should investors expect next?
Running out of road?
Globally-diversified FTSE 100-listed mining giant Anglo American(LSE: AAL) endured a horror show in 2015, its share price plunging 75% as Chinese demand slowed, metal prices fell, cheap oil smashed sentiment, and the stronger dollar did the rest. The stock was further hit by problems of its own in Africa. If you ever want a case study for the benefits of buying at the moment of maximum crisis, this stock could be it. 2016 started disastrously but then sentiment turned on a pin, as investors realised what a bargain Anglo American had become, dividend or no dividend.
The big danger is that the rebound is starting to run out of road, and you will be jumping on the recovery bandwagon at exactly the wrong time. Personally, I think China will slow further, as will its hunger for commodities.
Others are more bullish. Bank of America Merrill Lynch recently double-upgraded Anglo American from 'underperform' to 'buy' after approving its downsizing plan, and set a target price of 800p, against today's 606p. That would suggest another 33% growth in the pipeline, although I reckon the going could prove stickier from here.
Industrial metals such as copper and iron ore suffered last year, but precious metals only shone more brightly by comparison. Investors in Mexican-focused silver and gold miner Fresnillo(LSE: FRES) have cashed in, with the stock up 50% in the last six months, as investors fled volatile stock markets for the safe haven of gold. Fresnillo has been given an added boost by rising production levels, which helped to boost total revenues from $1,414m to $1,444m last year. Gold production in particular dazzled, up 27.8% to 762 koz, well ahead of guidance.
The downside was that Fresnillo's average realised price of gold and silver actually fell, by 10.4% and 16.1% respectively, while its final dividend of 3.35 cents disappointed, despite being upped from 3 cents. Yet markets quickly shrugged off their concerns amid gold bull excitement, which has driven the price up almost 20% year-to-date.
Mali-focused gold miner Randgold Resources(LSE: RRS) is also enjoying today's gold rush, with the share price up a precious 50% in the last six months, despite an 11% drop in first-quarter production due to operational difficulties.
Nevertheless, a rising gold price floats all boats, boosting Q1 profits by 19%, and putting the wind into investors' sales. Management is sticking by full-year production guidance, expecting to catch up over the rest of the year.
Where Fresnillo and Randgold go next largely depends on the price of the metals they mine. Gold and silver price growth has slowed in recent weeks, but another bout of stock market turbulence could send them flying again. If that doesn't happen, you may regret buying at today's heady prices.
Gold has its charms but we believe stock markets will prove more rewarding in the longer run.
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Harvey Jones 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.