Why the Anglo American share price could outperform the FTSE 100

Roland Head takes a long-term view on the valuation of FTSE 100 (INDEXFTSE:UKX) miner Anglo American plc (LON:AAL).

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Mining group Anglo American (LSE: AAL) has stayed firmly ahead of the FTSE 100 over the last year, climbing 32% versus a 3% gain for the index.

But over a five-year period the company is roughly level with the Footsie, with both having delivered gains of about 17%. In Anglo’s case this vanilla performance masks a dramatic slump in 2015, when the global mining market crashed.

The rate at which miners have recovered from this downturn has been impressive. What’s less clear is whether these companies can continue to beat the market.

One key number

City analysts are forecasting a modest decline in profits in both 2018 and 2019. However, my experience is that these forecasts aren’t always that reliable. For example, consensus estimates for Anglo’s 2018 earnings have risen by 45% over the last year. Who knows what will happen over the next 12 months?

When forecasts are unreliable, one alternative approach used by value investors is to consider a company’s past performance over a long period, ideally 10 years.

I’ve dug out Anglo American’s profit numbers for the last 10 years from the firm’s 2017 annual report. These show that since 2008, underlying earnings — analysts’ favoured measure — have averaged $2.67 per share, or around 200p per share.

At the last-seen share price of 1,760p, this puts the stock on a 10-year average price/earnings ratio of just 8.6.

That seems cheap enough to me, especially as it’s paired up with low debt, strong cash flow and a forecast dividend yield of 4.7%. In my view, Anglo American has a good chance of beating the FTSE 100 over the next few years.

Can this small-cap finally win gold?

Russia-based gold miner Petropavlovsk (LSE: POG) has delivered mixed results since its 2015 refinancing.

Today’s half-year results suggest that these difficulties have continued into 2018. Production fell by 15% to 201,400 oz. during the six months to 30 June, cutting group revenue by 11% to $270m.

Lower production and adverse currency factors pushed up the group’s total cash costs up from $675/oz. to $899/oz. As a result, the business slumped to an operating loss of $17m for the half-year period, compared to a profit of $65m last year.

The good news is that the second half of the year is expected to be much better. Total cash costs are expected to fall to $750-$800/oz. for the full year. And gold production is now expected to be between 420,000 oz. and 450,000 oz.

A turning point?

The company should also benefit from more stability in the boardroom. Founders Peter Hambro and Dr Pavel Maslovskiy both lost their jobs in 2017. But Dr Maslovskiy regained the CEO position earlier this year, and the firm announced today that Hambro will now take up a new advisory role.

Looking ahead, production from the delayed POX Hub facility is finally expected to get under way in 2019. This is expected to boost production to 500,000/oz. in 2019. Total cash costs are expected to fall below $700/oz., and profits should rise substantially.

Analysts’ forecasts for 2019 put Petropavlovsk on a forecast P/E of just 5.7. This looks cheap, but I think this is fair considering the risk of further problems. This could be a speculative turnaround buy, but personally I think there are better choices elsewhere in the gold sector.

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.

Roland Head 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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