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Could Kazakhmys plc Oust Rio Tinto plc From Your Portfolio?

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It’s been a good year for investors in Kazakhmys (LSE: KAZ), with the copper and gold-focused mining company seeing its share price rise by an impressive 39% since the start of the year. This is a much better performance than the FTSE 100, which is flat over the same time period, while sector peer Rio Tinto (LSE: RIO) (NYSE: RIO.US) is up just 1% year-to-date. Does this mean, though, that Kazakhmys now has a better outlook than Rio Tinto and, as such, is a better buy than its sector peer?

Mixed Results

Today’s results from Kazakhmys were mixed. On the one hand, the company is making encouraging progress with its new strategy that will see several non-core assets sold in order to make the business leaner, meaner and (potentially) more profitable. The strategy seems to be a sound one: Kazakhmys intends to sell-off mines that are relatively unprofitable, in favour of lower cost and larger mines.

On the other hand, Kazakhmys is experiencing disappointing short term output numbers, with the company now stating that the current year’s production levels are likely to be below previous guidance. This is perhaps to be expected when a company is going through such major changes, but is nevertheless disappointing for shareholders in the meantime, since market sentiment (which has been buoyant of late) is likely to dissipate to some degree.

Looking Ahead

Clearly, the longer-term future looks bright for Kazakhmys. It will focus on copper production and is forecast to increase earnings per share (EPS) by a whopping 106% this year and an even better 122% next year. Of course, previous years were highly challenging for Kazakhmys, with earnings falling by 89% last year, for instance, but the company seems to be back on-track and, with its new strategy, could deliver positive numbers moving forward.

Rio Tinto

While Rio Tinto doesn’t have the same forecast growth rate, its focus on iron ore also makes it a highly cyclical play. For instance, while 2013 saw earnings increase by 10%, they had fallen by 38% in the prior year. So, while its bottom line is less volatile than that of Kazakhmys, Rio Tinto remains a company with profits that are likely to fluctuate. Looking ahead, its EPS is expected to fall by 6% this year and rise by 8% in 2015, a rate of growth that is considerably behind that of Kazakhmys.

Valuation

On the face of it, Kazakhmys looks expensive. It trades on a price to earnings (P/E) ratio of 61.7, for instance. However, when its forecast growth rate is taken into account, the company has a price to earnings growth (PEG) ratio of just 0.6, which is hugely attractive. Indeed, even if it misses growth forecasts by a considerable amount, its PEG ratio should remain below the key 1.0 level, thereby offering a considerable margin of safety at current price levels.

Meanwhile, Rio Tinto is far cheaper than its peer, with it having a P/E of just 11.1. However, its PEG ratio is a much higher (although still fairly attractive) 1.4. As a result, while far riskier, Kazakhmys could prove to be a strong performer and could outperform Rio Tinto in future. That said, both companies seem to complement each other well and offer a potent mix of value and growth potential.

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Peter Stephens owns shares of Kazakhmys. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.