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2 bargain resources stocks set to beat the FTSE 100

Anglo American: Fair use

The last year has been quite spectacular for the resources sector. A number of commodity prices have risen and their outlooks are much more positive than they were 12 months ago. This has led to improving investor sentiment, with triple-digit gains not uncommon among resources companies in 2016. Looking ahead, further gains could be on the cards. Here are two stocks that still seem to offer FTSE 100-beating prospects.

A reinvented miner

In the past year, Lonmin‘s (LSE: LMI) share price has risen 115%. That’s 92% higher than the FTSE 100’s performance and key to this has been the company’s successful strategy. First of all, Lonmin put together the cash resources required to not only survive lower commodity prices, but also to build a better business. Although its fundraising wasn’t taken up in full by investors, it nevertheless allowed the company to invest in order to generate efficiencies, become more streamlined and more profitable.

In fact, in the current year Lonmin is forecast to reduce its loss per share from over 27p to less than 5p. Next year, it’s expected to record a profit on a per share basis, which has the potential to boost investor sentiment in the stock as the market begins to price-in improved performance. And with an improved business model, a rising bottom line looks relatively likely over the medium term.

Certainly, Lonmin remains highly dependent on commodity prices, and they will have a major impact on its future financial performance. However, with net assets of £1.15bn and a market capitalisation of only £373m, the company offers a large margin of safety, which indicates now could be a good time to buy it.

A fast-growing miner

Also making major changes to its business model in the last couple of years has been Anglo American (LSE: AAL). Its shares have risen by 273% in the last year as it has streamlined its divisions through asset disposals, improved the quality of its asset base and invested where necessary in order to create a more enticing long-term growth profile.

These changes seem to be paying off. Anglo American is forecast to record a rise in its bottom line of 57% in the current year. If met, this would put it on a price-to-earnings (P/E) ratio of just 7.3. This would indicate major upside, since its shares could double and still not appear to be overvalued. Like Lonmin, Anglo American’s outlook is, of course, highly dependent on the performance of commodity prices. However, with a relatively well-diversified business model and improving finances, it seems to offer a sufficiently wide margin of safety to merit investment.

Clearly, the company’s shares are likely to be volatile over the next year and the outlook for the world economy could change. But for investors who are able to focus on the long term and live with a rapidly changing share price in the short run, Anglo American could be an excellent buy.

More FTSE 100-beating shares?

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The companies in question offer index-beating potential due to their relatively attractive valuations and sound growth prospects. Therefore, they could boost your portfolio's performance this year.

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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.