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Is this turnaround stock still a bargain after 140% revenue growth?

One of the toughest challenges for investors is knowing when to sell. It’s not always easy to judge when a stock is starting to look expensive.

Today I’m going to look at the latest figures from two mining firms whose shares have doubled over the last year. Is it time to take profits?

140% revenue growth

In an update this morning, mining-royalty firm Anglo Pacific Group (LSE: APF) said that it expects to report revenue from royalties of £20.5m–£21.5m for 2016. This represents a 140% increase on 2015, when the firm reported revenue of £8.7m.

The majority of this increase is the result of a significant increase in the volume of coal being mined from the group’s private royalty lands at the Kestrel mine, in Australia. This is set to continue in 2017, with 85%–90% of Kestrel mine output expected to come from Anglo Pacific’s royalty lands.

A rapid turnaround

A year ago, Anglo’s position looked weak. Net debt was rising and the firm’s shares offered a staggering dividend yield of 12%. This yield was a warning — the payout wasn’t covered by earnings, and was considered unaffordable by the market.

Anglo shares have risen by 137% since then, as last year’s rising coal price coincided with an increase in production from the group’s royalty lands. Surging cash flow during the final quarter of last year enabled the group to repay most of its borrowings, reducing net debt from £8.2m to £0.9m.

Should you take profits?

It’s not entirely clear to me whether Anglo Pacific’s management was far-sighted or just lucky last year.

However, the latest consensus forecasts suggest that Anglo’s earnings per share could rise by 150% to 15.7p in 2017. That would put the stock on a forecast P/E of just 8.1 and provide dividend cover of 1.5 times. With a prospective yield of more than 5%, the near-term outlook looks attractive to me. I’d hold.

Should you go straight to the source?

What I didn’t mention above is that Rio Tinto (LSE: RIO) owns the Kestrel mine from which Anglo Pacific received most of its royalties last year.

Kestrel is a relatively small part of Rio’s overall business, which is still dominated by iron ore. But the group has significant assets in coal, copper and aluminium, all of which have the potential to provide significantly higher profits in the future.

Rio shares are worth 109% more than they were twelve months ago. Although I don’t expect the big miner’s share price to double again, I believe the shares still look attractive, based on the latest earnings and dividend forecasts.

Rio is expected to report adjusted earnings of $2.55 per share for 2016. A 39% increase to $3.54 per share is pencilled in for 2017. This puts Rio stock on a 2017 forecast P/E of 11.7.

The group is expected to pay a dividend of $1.28 per share for 2016, giving a yield of 3.1%. But because the dividend is now linked to earnings, the 2017 payout is expected to rise by 39% to $1.78. This gives Rio stock a forecast yield of 4.3% for 2017.

This valuation looks appealing to me. I rate Rio as a buy at current levels.

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Roland Head owns shares of Rio Tinto. The Motley Fool UK owns shares of Anglo Pacific. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.