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Is this mid-cap high flyer even better than Rio Tinto plc?

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View of a gold mine from above
Image source: Getty Images.

Mining and exploration company Central Asia Metals  (LSE: CAML) delivered pleasing full-year results today with revenue up almost 54% compared to a year ago and adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) shooting 66% higher. The directors pushed up the total dividend for the year by 6%.

Big acquisition

The big news during 2017 was the gargantuan $402m November acquisition of Lynx Resources, which brought the Sasa zinc-lead mine in Macedonia into Central Asia Metals’ portfolio of producing assets. Prior to this, the company’s principal business activity was the production of copper cathode from its Kounrad operations in Kazakhstan. The combination of CAML and Lynx provides commodity, geographic and operational diversification, and CAML’s chairman, Nick Clarke, said: “We can already see the benefits of our acquisition,” and he pointed to the firm’s strong showing on EBITDA and EBITDA margin. Profits and margins were also driven up by a “much improved”copper market where the London Metal Exchange (LME) price increased by 30% during the year. 

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Mr Clarke thinks the diversified and enlarged business will enable the firm to remain well positioned throughout the commodity cycle,” but sounded what I perceive as a warning, saying that the sector “is now starting to experience cost inflation.” I can remember the last time the mining industry lost control of its costs back in 2006/07. The situation presaged the bursting of the ‘commodity-super-cycle’ bubble, so I’m nervous about holding mining stocks today.

The ups and downs of cyclicality

However, the near-term outlook remains positive because many in the industry expect a challenging 2018 for copper supply “that could result in another positive 12 months for the copper price.” Mr Clarke also explained that in the market for zinc, “supply-side challenges remain,” which could push the price up because of rising demand expected to increase to over 15m tonnes by 2019. 

Right now, Central Asia Metals is flying high, and if you are looking for an investment in a miner, it could be an even better bet than one of the gigantic mining operations such as Rio Tinto (LSE: RIO), which has enjoyed a couple of years of earnings growth. In fact, right now, the firm is throwing off cash, paying a big dividend and everything in the garden looks rosy.

But you don’t have to look back very far to see that things are not always rosy for the miners — sometimes, the landscape looks positively weed-clogged. As recently as 2014 and 2015 the firm posted big declines in annual earnings and the share price dipped around 55% below today’s level of 3,690p or so in early 2016, and the dividend was reduced. Mining companies are among the most cyclical you can buy shares in, and trading outcomes are always at the mercy of prevailing market commodity prices. That’s worth remembering if you are attracted to a firm like Rio Tinto for its fat dividend. To me, big cyclical firms such as Rio Tinto are for shorter-term trades aimed at catching the up-leg in a cyclical share-price move, but I’ll look elsewhere for my long-term dividend investments.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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