I think this FTSE 250 miner could beat the Anglo American share price

The Anglo American plc (LON: AAL) share price looks cheap to me, but this FTSE 250 (INDEXFTSE: MCX) miner could be even cheaper.

| 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.

If you’re thinking of investing in a mining giant like Anglo American (LSE: AAL), you need to be able handle the short-term risks. There’s no product differentiation and prices are fixed by world markets, which means a miner really can’t have any competitive edge over other producers.

Market prices are erratic, which makes profits, dividends and therefore share prices volatile.

But over the long term, a business producing things that the world simply cannot do without has to be a good defensive one. And miners can be cash cows too, over the long term.

Production

In Q4, Anglo’s copper production was up 23%, diamond output from De Beers was up 12%, and metallurgical coal rose by 15%. The only major product to drop in volumes was iron ore from Kumba, down 13%. But overall it was, as chief executive Mark Cutifani said, another strong quarter.

Over the past couple of years, the Anglo American share price has recovered from a cyclical downturn in commodities prices. And in my view, when metals and minerals are cheap and mining shares are down, that’s the best time to buy — every down cycle in my lifetime has always come back up again and depressed share prices have alway recovered.

What about now?

The share price rise has flattened-off over the past 12 months with small falls in earnings on the cards, but that’s left the shares offering forecast dividend yields of around 4.4%. I reckon that’s good value, though I’d suggest only buying if you’re looking at holding for at least 10 years.

More volatile

Shares in Kaz Minerals (LSE: KAZ) have been even more erratic over the past few years, and are trading well below their big 2018 spike.

An acquisition in Russia, growing threats of international trade wars, and the general world economic climate all appear to be adversely affecting sentiment towards the copper miner. But it’s still getting the stuff out of the ground, with the firm’s Q4 update showing total copper production for 2018 up 14% to 294.7 kt.

The company also produces metals found alongside copper, though zinc production dropped by a similar 14% to 49.7 kt. Gold and silver output were both up slightly.

Ten years

Chief executive Andrew Southam pointed out that 2018 was the 10th year in a row that the company has met its copper production targets, thanks to the development of its Bozshakol and Aktogay projects in Kazakhstan.

Earnings are predicted to be relatively flat over the next couple of years, but KAZ is expected to be paying dividends — albeit modest ones yielding around 1.5% at this stage, though covered around tenfold by earnings.

Low valuation

The current valuation puts the shares on P/E multiples of only around 6.5, which does look very low to me compared to the sector — I expect some discounting due to the cyclical nature of the supply and demand cycle, but not that much.

I also think those earnings forecasts could be too pessimistic. Further growth potential at both Bozshakol and Aktogay could well have been underestimated, and the development of the Koksay resource (also in Kazakhstan, and announced only in June 2018) looks like it could result in a boost to production.

I’m held back by the political aspects of the company, but in valuation terms I like the look of it.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »