Despite making a strong start to 2017, the mining sector still appears to offer a number of enticing investment opportunities. Investors seem to be somewhat nervous regarding the outlook for the industry, which is causing valuations to be depressed. That’s perhaps understandable, since the dollar’s strength may or may not continue, while the prospects for global GDP growth are unclear even over a short time period.
With that in mind, there may be better options than Sirius Minerals (LSE: SXX) available at the present time. Here is one opportunity which could outshine the company over the medium term.
A changing business
Anglo American (LSE: AAL) has endured a hugely challenging period. It posted three years of losses in the four financial years between 2012 and 2016. While this led to a falling share price and a disappointing period for its investors, it forced the company to make major changes to its business which are now starting to bear fruit.
For example, the company made multiple asset disposals in order to rebalance its asset base. This reduced overall risk and improved return potential. Furthermore, it streamlined its business in order to create a leaner and more nimble entity. This allowed it to return to profitability last year and with the company’s bottom line forecast to rise by 38% this year, it seems to be on the cusp of increasingly impressive returns.
Investment option
Despite Anglo American’s upbeat outlook and its more enticing business model, it continues to offer a wide margin of safety. As mentioned, investors seem unwilling to uprate mining companies due to the uncertainty which faces the sector. As such, Anglo American’s shares trade on a price-to-earnings growth (PEG) ratio of just 0.2 at the present time. This indicates that there is significant capital growth potential on offer.
By contrast, Sirius Minerals is a company which has no revenue and no certainty of following through with its ambitious plan. Certainly, demand for the polyhalite fertiliser it hopes to produce is high and rising demand for improved crop yields means it has a bright future. However, there is a long journey ahead before Sirius Minerals becomes an operational entity in terms of generating revenue and profit. In that time, there are many challenges which mean that its risk profile is significantly higher than that of Anglo American.
While Sirius Minerals offers high potential rewards, so too does Anglo American. The latter’s turnaround plan is starting to positively impact its earnings, but there are clearly still further gains on the horizon. With such an enticing risk/reward opportunity available via Anglo American in what remains a relatively undervalued sector, it is difficult to make a relative investment case for the purchase of Sirius Minerals. That’s exacerbated by its high risk and potentially distant return potential, both of which appear to make Anglo American a more logical buy for the long term.
