Today I’ll be discussing the outlook for mid-cap steel producer and mining company Evraz following today’s half-year results. Could this lesser-known company be a better investment than FTSE 100 goliaths Rio Tinto and BHP Billiton?
Evraz takes a tumble
UK-focused investors could be forgiven for claiming never to have heard of Evraz (LSE: EVR) or its substantial steelmaking and mining activities, but English football fans will certainly know about its owner Roman Abramovich. Yes, the principle shareholder of this often-overlooked mining company is none other than the famous Chelsea owner and Russian billionaire himself. Today saw the firm announce its results for the six months to June, with pre-tax profits plummeting 60% to $48m from $120m, and a 28% decline in revenue to $3.44bn from the $4.78bn reported for the same period in 2015.
The market wasn’t amused with the shares down 6% by mid-morning. However, the company remains cautiously optimistic for the second half of the year, with market consensus suggesting a return to profit for the full year after four years in the red. But with underlying earnings set to nosedive again in 2017, I think investors should ask whether the forward P/E ratio of just nine could be nothing more than a value trap.
But are Rio Tinto or BHP Billiton better investments?
Profits take a dive in Rio
Anglo-Australian mining giant Rio Tinto (LSE: RIO) reported its interim results earlier this month with first-half profits falling to their lowest level in 12 years. Underlying earnings for the six months to 30 June fell by a massive 47% to $1.56bn, with pre-tax profits down to $5.36bn, some 27% lower than the first half of 2015. As a consequence the company slashed the interim dividend by more than half from 107.5¢ to 45¢ per share in line with its new policy to link payouts to underlying earnings. But management did reassure investors that the full-year payout would be no lower than $1 per share.
Despite the uncertainties regarding commodity prices, Rio remains optimistic about the long-term demand outlook and expects global steel demand to rise by 2.5% a year until 2030. The company is pressing ahead with major investment projects along with further cost-cutting measures. But with full-year earnings expected to fall 27% this year and the price-to-earnings ratio approaching 18, I think Rio Tinto is still too expensive and too risky for the majority of retail investors.
Record-breaker
Earlier this week, Rio Tinto’s great rival BHP Billiton (LSE: BLT) announced its annual results for the year to the end of June revealing some very disappointing numbers. The blue chip mining giant posted a record-breaking $6.4bn loss for 2015/16, in stark contrast to the $1.91bn profit of a year earlier. Unsurprisingly, management cut the final dividend to just 14¢, bringing the total for the year to 30¢, a far cry from last year’s payout of 124¢.
For me there’s far too much uncertainty surrounding the company, with compensation claims around the Samarco dam disaster, China’s economic slowdown, and continued weakness in commodity prices adding to the company’s woes. At current levels the shares are trading at 30 times forecast earnings for fiscal 2017, a risk too far for most.
