Should you pile in to FTSE 100 10% yielder Evraz?

Evraz plc (LON: EVR) and KAZ Minerals plc (LON: KAZ) both have updates out, but which is the better buy?

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If you’re a lifelong dividend investor, it’s pretty rare that you’ll manage to bag a 10% yielder. And it’s even less likely that you’ll find such candidates in the FTSE 100.

But that’s the situation with miner and steel producer Evraz (LSE: EVR), which has come storming back from a few tough years and looks set to deliver an impressive performance this year — along with a forecast 10.6% dividend yield.

I was bullish in January when the dividend looked set to yield a more modest 6.8%. And the firm’s first-quarter update doesn’t really shake me from that position, despite falls in output caused, in part, by bad weather.

Severe weather conditions in the first two months of the year apparently had an impact on the availability of iron ore. That led to an 8.6% drop in pig iron production from the firm’s plants in Russia and Ukraine, from 2.8m tonnes to 2.6m.

And as a knock-on effect, crude steel production fell by 6.9%, from 3.1m tonnes to 2.9m leading, in turn, to a 5.7% fall in total steel product sales. But all of this seems to be a one-off and I don’t expect any long-term effect.

I am, however, a little concerned about the firm’s level of debt, which stood at £3.97bn at the end of 2017. But that was 17% down on the previous year and I expect it to continue to drop.

Evraz shares have trebled in value in the past two years, but with a low forward P/E multiple of only 5.3, I could see more to come.

A five-bagger

If you want to see an even more impressive share price gain, look no further than KAZ Minerals (LSE: KAZ). Its shares have five-bagged in the same two years and a couple of months ago, I said that they might be running out of steam and set for a fall.

So far, that hasn’t happened — in fact, we’ve seen a further 8% rise. But I’d still be twitchy if I held KAZ shares.

Again, we’re looking at an impressive recovery after a tough spell during the commodities downturn. And after a terrific performance in 2017, further EPS growth penciled in for the current year would give us a P/E multiple of a very undemanding 8.9. Unlike Evraz, though, KAZ isn’t going to make you rich from dividends any time soon — yields look set to deliver less than 1% this year and only 1.5% next.

Thursday’s first-quarter production report, taken on its own, might have persuaded me that the company is a buy, as it’s apparently “on track to achieve 2018 production guidance for all metals.

Copper production is up 3% overall, based on higher output at the company’s Bozshakol and Aktogay facilities, with Bozshakol the clear leader after delivering a 20% rise in copper production, coupled with 29% more gold.

But net debt stood at $2,206m at 31 March, which is around twice the previous year’s EBITDA. That’s a bit concerning on its own, but I’m further disturbed to learn that it’s up 7% since 31 December.

The tougher quarter won’t have helped, but I do wonder if KAZ is perhaps operating too close to the edge of not being able to get its debt down and whether a future downturn could cause havoc. It’s not for me.

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.

Alan Oscroft 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.

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