The mining sector is one that investors tend to love or hate. Metals, minerals, coal and all that are essentials the world simply can’t do without, and that should mean we’re looking at safe long-term investments, shouldn’t it? The problem is that world demand and commodity prices are erratic over the course of economic cycles, and that makes mining share prices cyclical too.
Copper strength
After a slump, Antofagasta (LSE: ANTO) shares were down in the dumps at the start of 2016 along with much of the sector. But since then, the price has soared by more than 130% as the cycle has reversed, to a large extent on the back of recovering copper prices. But the timing of the cycle could be important, and I’m no good at trying to time the markets or the economy — I even have trouble timing my boiled eggs.
So all I can do is go on fundamental valuations and a long-term view, and with a horizon of 10 years and more, I think mining stocks can make solid income investments that could help bring your retirement date forward.
Saying that, Antofagasta’s figures give me pause for thought right now. Dividends have been volatile (as they often are with the sector) over the past few years, and we’re looking at forecast yields of only around 2.5% to 2.7%. At the same time, the shares are on a forward P/E multiple of 19 this year, dropping only as far as 17 for 2020.
Production is going well, mind, with the second quarter seeing a 5.3% rise in copper output to 198,600 tonnes. Grades are improving, and the firm has managed to reduce its production costs by 8% — though that latter is partly down to currency movements. Full-year guidance suggests production of 750-790,000 tonnes.
But I can’t help thinking the current health of the company is already in the share price, and that maybe copper price rises have stalled.
Impressive recovery
Applying the same basic thoughts, I can’t help feeling that the recovering Anglo American (LSE: AAL) is looking like a better value investment right now. Admittedly, the share price has soared since the depths of the company’s troubles back in 2015-16, but since then we’ve seen Anglo American getting back on track and reinstating its dividend.
Forecasts indicate yields of better than 4.5% this year and next, which is close to the FTSE 100 average right now, and the payments would be more than twice covered by forecast earnings. All that is from shares on P/E multiples of around 9.5, so why the low fundamental valuation?
The firm has released first-half results from its platinum division and from its Kumba iron ore business in recent days, and both are looking strong. Earnings and cash flow are both accelerating, and targeted costs savings look to be on track.
But there’s still significant net debt, which stood at $2.8bn at 31 December 2018, and Anglo is still in the throes of top-level management changes. But I still can’t help seeing those dividends and the current low stock valuation as tempting, though only with an investment horizon of at least a decade.
