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Can Anglo American continue to outperform the FTSE 100?

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FTSE 100 miner Anglo American (LSE: AAL) has been one of the strongest performers in the UK’s leading blue-chip index over the past year. Its shares have gained nearly 68% in the past 12 months, against a rise of just 3% for the FTSE 100. Can the miner continue to outperform the index, or is the stock overdue for a correction?

Trade tensions

Anglo American shares appear to have hit a stumbling block this week. After rallying strongly since the beginning of the year — and looking like £20 a share might finally be in sight — the shares have pulled back over the past week to 1,768p after a top-out at 1,933p on Tuesday.

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The company is not alone, however, as shares across the mining sector have been hit this week amid rising trade tensions following a US probe into automotive imports that could lead to new tariffs.

Fundamentals

Certainly, it’s hard to ignore the risks of a trade war, given the potential implications for the global demand for commodities, but aside from recent trade fears, fundamentals are broadly supportive. With resilient global growth, demand across almost all commodity groups has picked up, driving commodity prices higher.

Anglo American has also been making substantial progress in what it can actually control — cutting costs, reducing debt and growing production. Its financial performance has improved markedly, yet its shares trade at a significant discount to its peers.

Valuations

Anglo American shares trade at just 9.9 times its consensus analysts’ forecast for earnings this year, while the sector is on average valued at 12.4 times forecast earnings. On free cash flow, things look even cheaper, with the stock valued at 6.6 times its forecast free cash flow in 2018, against the sector average of 9.1 times.

What’s more, due to its attractive free cash flow, the stock also offers exciting dividend growth potential. City analysts expect dividends per share to rise by as much as 11%, giving it a prospective forward yield of 4.8%. With such tempting income prospects and low valuations, I reckon a re-rating of its shares could quite possibly lie ahead.

Another momentum play?

Another top performer from the FTSE 100 worth watching out for is EVRAZ (LSE: EVR). The steel-maker and miner, which is part owned by Russian billionaire Roman Abramovich, is also benefiting from an upswing in the global commodity markets.

Amid rising prices, net profit swung from a loss of $188m to a profit of $759m last year. Encouragingly, particularly for income investors, free cash flow more than doubled from $659m in 2016, to $1.32bn.

Dividend policy

With net debt falling and the group’s balance sheet in much better shape, the company has returned to paying regular dividends. EVRAZ paid $0.60 per share last year, and looking ahead, the company aims to pay a minimum amount of $300m per annum going forward.

This gives it a minimum payout of $0.21 per share, but City analysts expect it to be more generous. The consensus forecast is for a payout of roughly $0.60, earning shareholders a potential yield of 8.6% this year.

On the downside, investors would need to be wary of geopolitical risks, on top of the usual commodity sector risks. Given that nearly half of its revenues comes from Russia and Ukraine, the company is not only exposed to a higher level of currency volatility, but also potential sanctions and trade risks.

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Jack Tang 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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