I believe mining shares are inherently dangerous for investors. When I study a mining company’s accounts, I conjure up images of oil and gold prospectors from the 19th century. The issue I have is that, although the process is now more scientific than years gone by, knowing exactly what lies beneath the ground is still a bit of a stab in the dark.
The risk to investors doesn’t end there. Once there is a degree of certainty about what the company is dealing with, there has to be a huge outlay of capital to install the infrastructure needed to extract the product from the ground. This is all before the company has generated any revenue, let alone reaching peak output. Money isn’t made, until long after the shovels hit the ground.
A similar story?
Look at Sirius Minerals. At its Woodsmith mine in the North Yorkshire Moors, it is sitting on a huge reserve of polyhalite. It hopes to build the world’s largest polyhalite mine, but without generating cash flow, it is having difficulty obtaining funding to get the mine running and hitting its target of 10 million tonnes per annum by 2024.
The lack of funding, and therefore production, has seen the share price drop by over 85% in the past year. Investors are still waiting for an update from Sirius Minerals, after the company announced it has failed to get its Phase 2 financing off the ground. The company is running out of time, and investors are losing patience.
So what do I think of Evraz (LSE: EVR)?
Cheap, but are they worth it?
To start with, the Russian steelmaker looks very cheap. Over the past year, its price has dropped by 27%, making its price-to-earnings ratio just 4. On this valuation, it’s dividend yield is bonkers, at around 15%, skewed due to the recent slump in price.
In June, three directors and non-executive directors sold part of their stake in Evraz for over £86m. As well as this sell-off, Alexander Abramov also sold over £50m of his shares in March. Without an adequate explanation from the company, it’s understandable to see why smaller investors’ faith in the company is lacking.
For the directors, it was a good time to offload some stock and the share price over the past month alone has dropped by 17%. Part of this is due to a lack of demand in the market for steel, which accounts for a large proportion of profits for Evraz, along with declining prices for almost all major benchmarks.
With operations in Russia, investors may be concerned about government sanctions, but these are the least of my concerns. I have serious reservations about investing in this sector.
The ultra-high dividend and very low valuation may catch some investors’ eyes, but I would urge caution. I cannot say how low the stock will go, but with prices for its materials volatile across the market, and the shareholder dealings, I won’t be buying this stock.
T Sligo 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.