Should you buy this resources stock after it ramps up production?

The Motley Fool
Randgold Resources
Randgold Resources

Diversified resources company Vedanta(LSE: VED) has released a production report for the second quarter of the year, which shows that the company is making good progress.


Vedanta's overall focus is on ramping up production. For example, its Zinc India operations recorded a rise in mined metal production of 51% as well as an increase in silver production of 21%. This upward trend is forecast to continue into the third and fourth quarters of the year. Alongside this rise in production, Vedanta's aluminium operations have also expanded. In this area, it has endured some operational challenges. However, crucially for Vedanta's investors it doesn't expect its full-year aluminium volumes to be affected.

Of course, Vedanta's increasing production coupled with higher commodity prices is set to cause a return to profitability in the current year. Vedanta's pre-tax profit is expected to be £639m this year following two years of losses. Furthermore, pre-tax profit is forecast to rise to £822m in the next financial year, which could improve investor sentiment in the stock and push its share price higher.

Clearly, this is largely dependent on the prices of commodities. Although the outlook for oil, iron ore and copper is now much brighter than it was earlier in the year, the reality is that commodity prices could come under pressure. An Opec deal to cut oil production may now be more likely than a few weeks ago, but there's still likely to be a glut of supply. Similarly, rising iron ore production could hurt its price over the coming years.

Going for gold

Although Vedanta is well-diversified, the commodity price falls of recent years showed that they can fall in unison. In such a situation, the best performing commodity could prove to be gold. It's viewed as a relatively safe haven which, given the uncertain outlook for the global economy, could be a good place to invest over the medium term.

While gold miners such as Randgold Resources(LSE: RRS) have recorded share prices rises of up to 73% this year, they still offer good value for money. In Randgold's case, it trades on a price-to-earnings growth (PEG) ratio of 0.7 thanks to a forecast rise in earnings of 50% in the current year and further growth of 30% next year.

Looking ahead, the price of gold could come under pressure due to US interest rate rises. However, the chances of them increasing were reduced somewhat by slightly disappointing US employment data released last week. In addition, only one rate rise is forecast for the next year, which means that the price of gold (and Randgold Resources' profitability) could remain high over the medium term.

As such, Randgold Resources is a sound buy, while Vedanta offers upbeat turnaround prospects. It may not have the defensive qualities of a gold miner such as Randgold Resources, but Vedanta's increasing production should boost its financial performance and share price in future.

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Peter Stephens 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.