Large-cap stocks are usually considered safer than their small-cap peers, but this safety comes at a cost. As companies move into the large-cap bracket, growth generally starts to fade, which limits capital growth upside. And usually, as growth evaporates, these companies turn into dividend champions, paying out the majority of their income to investors, rather than reinvesting the proceeds.
However, it looks as if large cap miners Antofagasta (LSE: ANTO) and Anglo American plc (LSE: AAL) are bucking this trend.
Bucking the trend
Unlike many of their large-cap peers, Anto and Anglo are on track to report healthy earnings growth this year, as they recover from the mining industry downturn.
The mining downturn has changed the industry dramatically. After years of frivolous spending to achieve growth at any price, miners are now putting value over volume. This means new projects are few and far between, while existing mines are being redesigned to dramatically improve efficiency, increase margins, return on investment and pay down debt.
A shift away from volume and towards value has made the mining industry attractive again and investors have flocked to mining shares over the course of the last year. Indeed, over the past twelve months, shares in Antofagasta have gained 120%, and shares in Anglo are up an impressive 391%.
Further growth to come
Anglo’s drastic actions to cut debt and reduce costs over the past two years will really start to pay off over the next two years according to City analysts.
After falling 63% for the fiscal year ending 31 December 2015, Anglo’s earnings per share are expected to leap 127% for 2016. Further growth of 57% is expected for 2017, which should take Anglo’s earnings per share back to the level they were at three years ago. Based on these figures shares in the company are currently trading at a forward P/E of 12.1 for 2016 and 7.4 for 2017.
Considering the fact that shares in Anglo have traded at a forward P/E of 10 or more for the past five years, it looks as if the shares are currently undervalued based on 2017’s projected numbers. Assuming a forward P/E of 10, Anglo’s shares should be trading at 1,800p or more if City estimates for 2017 are to be believed.
Priced for growth
The City is expecting big things for Anto over the next two years. After reporting a minuscule earnings per share figure of 0.5p last year, analysts have pencilled in earnings per share growth of 5,281% to 25.6p for the year ending 31 December 2016. Further growth is expected over the next two years as well. Analysts are forecasting earnings per share growth of 21% per annum to 2018 and if copper prices continue to rise like they have done over the past 12 months, these figures could be subject to substantial revisions higher.
Specifically, the price of one tonne of copper has risen from $4,500 in January 2016 to nearly $6,000 today. Over the same period, Anto has slashed copper production costs by around 20%.
The bottom line
So overall, shares in Anto and Anglo look as if they could charge higher over the next 12 months as positive sentiment returns to the mining sector, and the companies continue to benefit from lower production costs.
