The Motley Fool

This resources stock could be a surprise performer in 2017

Platinum producer Lonmin (LSE: LMI) has released full-year results that have pushed its share price 7% higher today. They show that the company is continuing to make good progress, with its new strategy starting to bear fruit. Looking ahead to 2017, it could be a strong performer.

Lonmin’s reorganisation has resulted in a company that’s cash flow positive and on track to return to profitability in 2017. In the 2016 financial year, its operating profit improved to $7m from a loss of $134m in the previous year, while net cash improved from $69m at the end of the first quarter to $173m by the year-end.

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Its guidance of sales of 700,000 platinum ounces was exceeded, with Lonmin selling 735,747 platinum ounces in the year. This was supported by its smelter clean-up and metal release from improved processing technology. Lonmin also achieved a cost reduction of R1.3bn, which is 86% higher than its target of R700m.

Looking ahead, Lonmin expects to record platinum sales of between 650,000 and 680,000 ounces in 2017. Although it expects unit costs to remain under pressure, Lonmin is forecast to record a black bottom line in 2017 for the first time in three years. This has the potential to significantly improve investor sentiment in the stock, since it would represent tangible evidence that Lonmin’s turnaround is having a positive impact on its financial performance.

Better insulated?

Certainly, Lonmin will be highly dependent on the price of platinum in future. In this sense, it arguably has a higher risk profile than a more diversified sector peer such as BHP Billiton (LSE: BLT). It produces a range of commodities, such as oil, iron ore and copper. Therefore, BHP Billiton is better insulated from the potential volatility within commodity markets over the medium term.

And BHP Billiton is also in the process of reorganising its business. It has made several asset disposals as it seeks to strengthen its balance sheet and create a more focused and efficient business. BHP Billiton has been able to reduce costs significantly so as to make it increasingly competitive versus its sector peers and this bodes well for the company’s financial future.

In fact, BHP Billiton is due to record a rise in earnings of 254% in the current year. This has the potential to significantly improve investor sentiment in the company and shows that BHP Billiton’s strategy is having a positive impact on its financial performance. And with it having a lower risk profile thanks to its stronger balance sheet and better diversified business, BHP Billiton seems to have greater appeal than Lonmin for the long term.

Of course, Lonmin remains a sound buy, which could be set for significant share price gains. Therefore, its performance could be surprisingly strong in 2017 and mean that for less risk-averse investors, it’s a sound buy at the present time.

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Peter Stephens owns shares of BHP Billiton. 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.