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Are Acacia Mining PLC And Lonmin Plc Better Buys Than Rio Tinto plc?

The last year has been extremely tough for the mining sector, with shares in Acacia (LSE: ACA) and Lonmin (LSE: LMI) falling by 21% and 58% respectively, as commodity prices have come under severe pressure. As a result, both companies have seen their bottom lines fall and investor sentiment decline, which has led to many investors being of the view that they are not attractive investments.

Improved Prospects

However, both Acacia and Lonmin are set to deliver much improved performance over the medium term. Certainly, this is dependent upon the price of the commodities they mine (gold in Acacia’s case and platinum and gold in Lonmin’s), but even with the volatility that this may bring being factored in, they both appear to offer a considerable margin of safety.

For example, Acacia is forecast to increase its earnings by 29% in the current year, followed by 56% next year. That’s a stunning rate of growth and, judging by the company’s price to earnings (P/E) ratio of just 12.9, does not appear to be priced in. In fact, Acacia has a price to earnings growth (PEG) ratio of just 0.2, which indicates that growth is on offer at a very reasonable price.

Likewise, Lonmin is expected to post strong growth numbers following a challenging period. While in the current year its earnings are due to fall by 41%, exceptional growth of 384% next year means that they trade on a forward P/E ratio of only 11.5. As a result, they could offer significant scope for capital gains over the next few years.

Sector Peer

Despite this, sector peer Rio Tinto (LSE: RIO) (NYSE: RIO.US) still seems to offer greater appeal as an investment. That’s because it has a potent combination of value, growth potential and a great income, too. For example, despite being a dominant iron ore producer, Rio Tinto trades on a P/E ratio of just 11.6 which, when you consider that its bottom line is forecast to rise by 18% next year, indicates that excellent value for money is on offer.

Furthermore, Rio Tinto’s yield of 5.3% easily beats those of Acacia and Lonmin, which have yields of 1.6% and 0.1% respectively. So, if commodity prices do continue to disappoint, at least Rio Tinto looks set to provide its investors with a decent income in the meantime.

Looking Ahead

Clearly, Acacia and Lonmin offer superb long term potential and, although they are likely to remain hugely volatile, they could be worth buying at the present time. However, their larger sector peer, Rio Tinto, still has a greater depth to its appeal as an investment, with it also having the potential to become a bid target for a number of its sector peers. As such, Rio Tinto remains the pick of the three companies discussed here.

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Peter Stephens owns shares in Rio Tinto. 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.