China has hit the global mining industry with a surprise – a sudden increase in manufacturing that demands fresh raw materials from around the world. As a result, major mining companies have enjoyed a sudden uptick in production, prompting investment giant UBS to flip two major mining-related FTSE 100 stocks from ‘neutral’ to ‘buy’.
These two companies are Anglo-American (LSE: AAL) and Antofagasta (LSE:ANTO), both of which enjoyed a surge in share price last week when the news broke. I’m investigating whether the price increases will be short-lived or if these shares still have some room to grow.
Anglo-American is one of the largest mining conglomerates in the world, with a strong presence in South Africa and a focus on diamonds and platinum. Founded in 1917, the London-based firm employs 90,000 staff in 15 countries worldwide.
The buy signal from UBS is a positive indicator, but I’m digging deeper to discover if the company has long-term growth potential. With almost double the amount of assets as liabilities, Anglo-American’s debt-to-equity (D/E) ratio of 45.3% is reassuring — although this is higher than five years ago. Still, I think the future looks promising for Anglo-American, with earnings forecast to grow by 15.4% per year and deliver a return on equity above 10% in three years.
Impressive numbers – but there are some red flags.
Anglo-American’s profit margins in 2023 are significantly lower than in previous years, and from what I can tell the company may struggle to cover its dividend yield of 4.4% with current cash flows. However, these statistics may improve if increased manufacturing continues to push up prices. In the short term, I think Anglo-American has some decent growth potential, but I’ll look for consistent improvement before I can be assured of long-term gains.
Headquartered in London, Antofagasta is a multinational mining company founded in the late 1800s. Originally a railroad project carrying copper between Bolivia and Chile, it now runs several mining operations worldwide.
With a market cap of £14.4bn and earnings of £1.6bn, Antofagasta’s price-to-earnings (P/E) ratio is 11.5x – high enough to suggest positive sentiment while still below the three-year UK mining industry average of 23x. I believe this puts it in a good position to outperform expectations in the coming year. Even with the recent price rise, some analysts estimate Antofagasta to be 15% below its fair value, with revenue forecast to grow by nearly 8% per year.
However, this sudden price rise is no guarantee of continued growth. Long-term analysis has forecast Antofagasta’s earnings to decline by 1.3% per year over the next three years, with earnings per share (EPS) to decline by 0.9%. So long as China continues its manufacturing spike, I think Antofagasta has good short-term potential. However, I’ll keep a close eye on its financials over the coming months before making any long-term decisions.