This resources stock could be a surprise performer in 2017

Buying this resources company now could be a shrewd move.

| 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.

Platinum producer Lonmin (LSE: LMI) has released full-year results that have pushed its share price 7% higher today. They show that the company is continuing to make good progress, with its new strategy starting to bear fruit. Looking ahead to 2017, it could be a strong performer.

Lonmin’s reorganisation has resulted in a company that’s cash flow positive and on track to return to profitability in 2017. In the 2016 financial year, its operating profit improved to $7m from a loss of $134m in the previous year, while net cash improved from $69m at the end of the first quarter to $173m by the year-end.

Its guidance of sales of 700,000 platinum ounces was exceeded, with Lonmin selling 735,747 platinum ounces in the year. This was supported by its smelter clean-up and metal release from improved processing technology. Lonmin also achieved a cost reduction of R1.3bn, which is 86% higher than its target of R700m.

Looking ahead, Lonmin expects to record platinum sales of between 650,000 and 680,000 ounces in 2017. Although it expects unit costs to remain under pressure, Lonmin is forecast to record a black bottom line in 2017 for the first time in three years. This has the potential to significantly improve investor sentiment in the stock, since it would represent tangible evidence that Lonmin’s turnaround is having a positive impact on its financial performance.

Better insulated?

Certainly, Lonmin will be highly dependent on the price of platinum in future. In this sense, it arguably has a higher risk profile than a more diversified sector peer such as BHP Billiton (LSE: BLT). It produces a range of commodities, such as oil, iron ore and copper. Therefore, BHP Billiton is better insulated from the potential volatility within commodity markets over the medium term.

And BHP Billiton is also in the process of reorganising its business. It has made several asset disposals as it seeks to strengthen its balance sheet and create a more focused and efficient business. BHP Billiton has been able to reduce costs significantly so as to make it increasingly competitive versus its sector peers and this bodes well for the company’s financial future.

In fact, BHP Billiton is due to record a rise in earnings of 254% in the current year. This has the potential to significantly improve investor sentiment in the company and shows that BHP Billiton’s strategy is having a positive impact on its financial performance. And with it having a lower risk profile thanks to its stronger balance sheet and better diversified business, BHP Billiton seems to have greater appeal than Lonmin for the long term.

Of course, Lonmin remains a sound buy, which could be set for significant share price gains. Therefore, its performance could be surprisingly strong in 2017 and mean that for less risk-averse investors, it’s a sound buy at the present time.

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.

Peter Stephens owns shares of BHP Billiton. 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.

More on Investing Articles

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »

Investing Articles

I’d use a £10K ISA to try and generate £900 in dividends annually like this!

Christopher Ruane explains how he would invest a Stocks and Shares ISA in blue-chip companies to try and set up…

Read more »

Investing Articles

Here’s how I’d build a second income stream worth £1,228 a month by investing £10 a day!

A second income stream could come in handy later in life. This Fool explains how she’d build one by investing…

Read more »

Investing Articles

5 FTSE 250 stocks I’d buy for a lifetime of passive income

Here's why I think the FTSE 250 could be the best UK stock market index to go for in 2024…

Read more »

Union Jack flag triangular bunting hanging in a street
Investing Articles

Buy cheap FTSE shares, says HSBC

Analysts at HSBC have upgraded their rating of FTSE stocks and reckon the blue-chip UK index could carry on powering…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

It could be worth buying the dip for this FTSE 250 stock, down 7% today

Jon Smith spots a sharp drop in a FTSE 250 stock but explains why this could just be a blip…

Read more »