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Gold/Mining/Energy
88 Energy (LSE:88E) potential to deliver a high level of pro
An SI Board Since April 2016
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Emcee:  miningoz Type:  Moderated
In the last three months, shares in Rio Tinto (LSE:RIO) have made a major comeback. The iron ore-focused mining company has recorded a 34% gain during the period and for investors in the company, this has been a welcome event. After all, Rio Tinto's performance in recent years has been dire and has left many of its investors in the red.

Potential to outperformHowever, it could be argued that Rio Tinto's recovery in the last quarter pales into insignificance when compared to the share price gains made by resources peer 88 Energy (LSE:88E). Its shares have risen by a whopping 524% in the last three months due to it making a vast shale discovery in Alaska earlier this year. Since then, 88 Energy has also announced an increase in the independent resource estimate for the Icewine project in Alaska, with the probability of geologic chance of success rising to 60% from 40%.

Clearly, 88 Energy has the potential to deliver a high level of profitability in the long run and if news flow continues to be positive, its shares could continue to outperform those of Rio Tinto. However, it remains a far riskier investment than Rio Tinto, partly because it is relatively small, has no revenue and is highly dependent upon news flow to push its share price higher over the short to medium term.

Of course, Rio Tinto is not without risk. If the iron ore price falls heavily for example, its profitability would take a major hit. However, Rio Tinto has a very sound balance sheet with strong cash flow and should therefore be able to withstand a downturn in the resources industry better than the smaller and less financially secure 88 Energy. Furthermore, with Rio Tinto having one of the lowest cost bases within the iron ore mining space, it has a competitive advantage over many of its peers and this should enable it to deliver industry-leading profitability over the medium to long term.

The superior buyOn the topic of profit growth, Rio Tinto is expected to grow its bottom line by 27% in the 2017 financial year. Even though its shares have risen strongly of late, they still trade on a price to earnings (P/E) ratio of 23.8 which, when combined with its rating, equates to a price to earnings growth (PEG) ratio of just 0.9. This indicates that while Rio Tinto may not be able to match 88 Energy's share price rise of 524% in the last three months, it does have considerable potential rewards on offer over the medium to long term.

As such, it appears as though Rio Tinto's risk/reward ratio is more favourable than that of 88 Energy's. While the latter could easily beat Rio Tinto in terms of capital gains in the coming months, for most investors the lower risk of the mining major combined with its still handsome potential rewards make it the superior buy right now.

Any small cap round-up of this week must start with a trip on the rollercoaster that is Gulf Keystone Petroleum.

Like all good rides, shares were on the up initially, as the company confirmed it had been paid $15million for exports in March from the Shaikan field in the Kurdistan region of northern Iraq.

Gulf Keystone said the payment meant it would avoid a 'worst case scenario' after warning it was facing a potential debt crisis.

But, as my seven year old sister is learning in school, what goes up must come down and in the case of Gulf Keystone, shares came down hard.

The oil producer saw its shares in free fall after it revealed it would need to spend $71million to maintain its 40,000 barrels of oil per day production output.

To grow production to 55,000 barrels of oil per day, as it had previously targeted, an investment of $88million is likely needed.

Shares were around 5 per cent higher for the week on Wednesday, before crashing back down to earth to sit 31 per cent lower by Friday.

Plenty of snippets round the chattering city traders that Ascent Resources have been recieving the attention of bidders before the expected permit update from Slovenia which we hear has got the green light, the company getting talked about is Prospex Oil and Gas and the figure mentioned being £12m.

On a similar trajectory was Bisto and Mr Kipling owner Premier Foods, after US firm McCormick & Co dropped its plan to make a takeover bid.

There were no trademark sighs of relief for investors, as shares dropped 28 per cent to 42.17p.

The valuation Premier had on itself was too rich for the US firm, which was bad news for the share price, whichever way you slice it.

Going in the opposite direction was Peppa Pig majority stake owner Entertainment One, which, after a slow start, shot higher on speculation it could be approached by television giant ITV.

The company moved to dispel the rumours, suggesting the whole thing was just one big porky.

Investors, though, are clearly hoping a deal could still bring home the bacon, with shares more than 14 per cent higher for the week.

One deal that did take place, however, was Keywords Studio’s takeover of the Synthesis Group of companies, the largest in its highly acquisitive history.

The AIM-listed outsourcing group for the video games industry will pay up to €18million for Synthesis, with an upfront payment of €10.2million in cash. Shares rose more than 18p to 255p.

Another big winner this week was Iofina, iodine production in the first quarter was bang on expectations.

Sticking with the rollercoaster theme, the firm is 'right on track' with its production targets. Shares doubled, ending at 11.1p on Friday.

And it was the winners that dominated the AIM-All Share, with the index climbing every day, ending 1.9 per cent ahead of its open on Monday.

With a number of high flyers, software provider iEnergizer won the biggest gainer of the week award, after forecasting better-than-expected annual profits.

Shares, which have been relatively flat so far this year, rocketed almost 200 per cent by Friday to 26.75p.

It wasn’t all plain sailing for investors though, as shares in oil explorer RusPetro, tanked around 80 per cent after it announced plans to go private barely more than four years after it came to the market.

Finally, Tower Resources raised £5.2million in a share placing to fund its new project offshore Cameroon, in the Niger Delta, sending its price down by almost 30 per cent to 9.27p.
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