The ongoing trade tensions between the US and China have had a severe impact on commodity prices in recent weeks, most notably copper. While some may regard flagging demand for the latter as a sign of impending doom on the markets, I see recent volatility as a great opportunity for investors with time on their sides.
Why am I bullish? Simply because analysts are forecasting a supply deficit in the red metal over the next few years. This, combined with an increase in demand for new technologies including electric vehicles, could put a rocket under the stock prices of well-managed, quality copper miners in time.
It’s for this reason that I was drawn to today’s numbers from Kaz Minerals (LSE: KAZ).
Big acquisition
The share price of the FTSE 250 mining giant has been in freefall recently, partly due to investor jitters over its decision to buy the undeveloped but significant Baimskaya copper project in Russia for a little under £690m. While management regards the deal — completing in H1 2019 — as a demonstration of Kaz’s ambition, there is concern that operating in a different political environment to Kazakhstan will prove problematic for the company.
Thanks to a solid set of interim numbers, it would appear that at least some of this nervousness has been forgotten today.
Group revenues rose 31% to £1.1bn in the six months to the end of June with gross earnings before interest tax, depreciation and amortisation (EBITDA) climbing 37% to $690m. Pre-tax profit soared almost 48% to $355m at the same time as net debt fell to $2.05bn from $2.44bn. All looks rather good to me.
Positively, Kaz also maintained its guidance on production and costs for the full year (with the former at 270-300 kt), adding that planned expansion of its Aktogay mine was “progressing well“.
Given that the stock was trading on a bargain 5 times forecast earnings before today, it’s no wonder that some investors have taken advantage. The question is, do you have the risk tolerance to sit with the shares until they fully recover? At this price, I’m sorely tempted.
Monster dividends
Of course, Kaz isn’t the only option out there. Mid-cap Central Asia Metals (LSE: CAML) is a stock that’s been on my watchlist for some time.
Fortunately, I haven’t pulled the trigger yet. Had I done so in March, before all this trade rhetoric began, I’d be sitting on a loss of almost 40%.
So, what can Central Asia Metals offer that Kaz doesn’t? That’s easy — a decent dividend.
Actually, that’s something of an understatement. The stock is forecast to yield a stunning 7.5% in 2018, with the payout covered over twice by expected profits. That looks very reasonable compensation in return for a bit of patience. Contrast this return with today’s announcement from Kaz of its first dividend since 2012 (6 US cents per share) following the “successful delivery ” of its Bozshakol and Aktogat projects. An encouraging development, no doubt, but not in the same league as that offered by its peer. A cynic might even view it as a way of appeasing shareholders over Baimskaya as much as being an indication of management’s confidence in the company’s future.
Like Kaz, Central Asia Metals trades on a low valuation — just 6 times forecast earnings. While no one knows where the copper price will bottom, surely we must be entering oversold territory?
