Is this mid-cap high flyer even better than Rio Tinto plc?

I reckon this firm’s growth prospects make it more attractive than Rio Tinto plc (LON: RIO) even if cost inflation is making an impact.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Mining and exploration company Central Asia Metals (LSE: CAML) delivered pleasing full-year results today with revenue up almost 54% compared to a year ago and adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) shooting 66% higher. The directors pushed up the total dividend for the year by 6%.

Big acquisition

The big news during 2017 was the gargantuan $402m November acquisition of Lynx Resources, which brought the Sasa zinc-lead mine in Macedonia into Central Asia Metals’ portfolio of producing assets. Prior to this, the company’s principal business activity was the production of copper cathode from its Kounrad operations in Kazakhstan. The combination of CAML and Lynx provides commodity, geographic and operational diversification, and CAML’s chairman, Nick Clarke, said: “We can already see the benefits of our acquisition,” and he pointed to the firm’s strong showing on EBITDA and EBITDA margin. Profits and margins were also driven up by a “much improved”copper market where the London Metal Exchange (LME) price increased by 30% during the year. 

Mr Clarke thinks the diversified and enlarged business will enable the firm to remain well positioned throughout the commodity cycle,” but sounded what I perceive as a warning, saying that the sector “is now starting to experience cost inflation.” I can remember the last time the mining industry lost control of its costs back in 2006/07. The situation presaged the bursting of the ‘commodity-super-cycle’ bubble, so I’m nervous about holding mining stocks today.

The ups and downs of cyclicality

However, the near-term outlook remains positive because many in the industry expect a challenging 2018 for copper supply “that could result in another positive 12 months for the copper price.” Mr Clarke also explained that in the market for zinc, “supply-side challenges remain,” which could push the price up because of rising demand expected to increase to over 15m tonnes by 2019. 

Right now, Central Asia Metals is flying high, and if you are looking for an investment in a miner, it could be an even better bet than one of the gigantic mining operations such as Rio Tinto(LSE: RIO), which has enjoyed a couple of years of earnings growth. In fact, right now, the firm is throwing off cash, paying a big dividend and everything in the garden looks rosy.

But you don’t have to look back very far to see that things are not always rosy for the miners — sometimes, the landscape looks positively weed-clogged. As recently as 2014 and 2015 the firm posted big declines in annual earnings and the share price dipped around 55% below today’s level of 3,690p or so in early 2016, and the dividend was reduced. Mining companies are among the most cyclical you can buy shares in, and trading outcomes are always at the mercy of prevailing market commodity prices. That’s worth remembering if you are attracted to a firm like Rio Tinto for its fat dividend. To me, big cyclical firms such as Rio Tinto are for shorter-term trades aimed at catching the up-leg in a cyclical share-price move, but I’ll look elsewhere for my long-term dividend investments.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »