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Forget gold, here’s how I’d invest in precious metals in 2020

I always think gold miners are a better investment than the metal itself. But even they’re risky, mind, so I’d really only invest in miners that produce precious metals as part of a wider range of commodities.

Kaz Minerals (LSE: KAZ) is an example, though its share price has been erratic over the past five years. It’s based in Kazakhstan, where it operates open pit copper mining, and the location alone might put off some investors. But Kaz’s extraction method is a low-cost one, and that can provide a handy buffer when commodity prices fall.

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Kaz also produces gold and silver, which are commonly found as by-products of copper production.

Beating expectations

In 2019, the company beat its production guidance for both metals. Gold production of 201,000 ounces (up from 183,000 ounces in 2018) smashed through start-of-year guidance of 170,000-185,000 ounces. And silver output, at 3,382,000 ounces, was 13% ahead of guidance. Meanwhile, production of Kaz’s main target, copper, reached 311,000 tonnes (from 295,000 tonnes in 2018). That easily beat the company’s guidance of 300,000 tonnes.

In terms of income, Kaz sold 317,000 tonnes of copper (against 296,000 tonnes in 2018) and 225,000 ounces of gold (from 169,000 ounces).

World commodity prices have been weakening, though, with average copper prices on the London Metals Exchange down 8% in 2019. But this is where Kaz’s low production costs come to the fore. In 2019, the firm boasted an “industry-leading net cash cost of 77 us cents per pound” for copper, down from US85c/lb the year before.

That helped boost operating profit by 8% to $923m. Net debt is up, though, at $2,759m, from $1,986m. Overall, with metals markets under pressure, I think Kaz minerals shares look increasingly tempting.

Industry giant

FTSE 100 mining giant Anglo American (LSE: AAL) is perhaps more in investors’ minds right now as the suitor in the ongoing takeover of Sirius Minerals (LSE: SXX). But it also reported a rise in 2019 profits on Thursday.

Anglo is big in platinum group metals, and recorded modest rises in production for 2019. Total platinum production reached 2,050,600 ounces (from 2,020,500 ounces in 2018), with palladium production up 1,385,900 ounces ( from 1,379,000 ounces).

The wider picture shows copper production down 5%, “owing to lower water availability due to drought conditions.” Iron ore output dipped by 2%, total coal export production dropped 8%, and De Beers’ rough diamond production fell 13%.

On the upside, copper production costs were 6% lower in US dollars, helped by exchange rate movements.

Financials

On the financial front, results were impressive. In the words of chief executive Mark Cutifani, the firm generated “a 9% increase in underlying EBITDA to $10.0 bn, a 19% ROCE and a total shareholder return of 31% for the year.”

Again, we saw net debt increase, to $4.6bn. But that’s still less than half of underlying EBITDA, and the company put the increase down to “investment in growth opportunities.”

A full-year dividend of $1.09 (84.7p) per share represented a 9% uplift, and a yield of 4%, which I think is pretty good.

Would I buy Anglo American shares? Mining is very much a cyclical sector, and we should expect P/E multiples lower than average to compensate for expected volatility.

We’re looking at a P/E of around 10 for Anglo. I see that as good value, at a time when global economic weakness is impacting demand. I’d buy for long-term income.

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Alan Oscroft owns shares of Sirius Minerals. 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.