For any company to deliver FTSE 100-beating returns, it must have the financial strength and strategy to perform well over a long period. If not, it will inevitably encounter problems that could be enough to hurt its financial performance and share price.
Reporting on Tuesday was a mining company that has gradually improved not only its production, but its financial strength and efficiency in recent years. As such, it looks set to outperform the wider index in the next decade.
A transformational year
While the price of copper has been rather volatile in recent years, mining company Antofagasta (LSE: ANTO) has taken the decision to fundamentally change its business model. It has disposed of major assets in order to refocus its efforts mostly on copper production, and it has simultaneously sought to increase production capacity. This was evident in its results for 2016, which were released on Tuesday. They show a 12.5% rise in copper production, which helped to boost the company’s revenue by 12.3%.
Further production increases could be ahead. Antofagasta has made progress on its new projects despite capital expenditure being reduced by 24.2% in 2016. This shows that it is becoming more efficient in its use of capital, with productivity improvements and cost reductions likely to improve its profit potential in the long run. And, with the prospect of a higher copper and gold price in future years thanks to rising demand, its rate of profit growth could rise in future years.
In 2017, Antofagasta is forecast to record a rise in its bottom line of 17%, followed by further growth of 19% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.1, which indicates that it offers excellent value for money. Since the price of copper is expected to move higher over the medium term and Antofagasta now has a much-improved business model, it would be unsurprising for further double-digit earnings growth to be achieved in future years. This could help to keep its share price performance ahead of the FTSE 100 following its 26% out-performance of the index in the last year.
Of course, it’s not the only mining stock that could beat the FTSE 100. Sector peer Glencore (LSE: GLEN) has also restructured, lowered its costs, and become far more productive than it was previously. This has created a lower-risk business model that could deliver stunning share price gains in the long run. This year, Glencore is forecast to return to profit, and since it trades on a forward price-to-earnings (P/E) ratio of 12.7, its shares seem to offer excellent value for money.
There is still some way to go before Glencore completes its turnaround plan, and this could lead to higher gains in future as investor sentiment improves. As such, now could be the right time to buy it alongside Antofagasta, with both stocks having a relatively high chance of outperforming the wider index over the next decade.
Peter Stephens has no position in any shares mentioned. 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.