Other than also having their origins in South Africa, that’s pretty much where the similarity ends. A cyclical upswing in the industry has led to a strong recovery for Anglo American, whose share price is actually up 15% over the past five years. But over the same period, Lonmin shareholders are still sitting on a 98% loss.

Anglo American suffered from the downturn in metals and mineral prices, but commodities prices tend to keep in line with inflation in the long term, and that really should give investors who can ignore short-term ups and downs a significant advantage.

I can only see the demand for the company’s major consumable products, key among which are iron ore, copper and metallurgical coal, growing over the long term. As well as prices firming up, the firm’s production of all three is rising.

Diamonds

On top of industrial commodities, Anglo American is big in diamonds, having upped its stake in De Beers to a controlling 85% in 2011.

All of this has been helping drive the company to become a solid dividend stock.

Yields will fluctuate according to business cycles, and that can be a downside for those seeking regular income. But if you’re in a net investing phase and reinvest your dividends, year-by-year fluctuations really shouldn’t be a problem. Forecast yields of 4.6% and 4.7% for this year and next look very attractive to me.

While P/E ratios are typically low at the top of a business cycle, forward multiples of under nine look like good value to me — even if you did miss the big bargain sale when Anglo American shares were a lot cheaper.

Takeover

Lonmin’s fortunes have fared very differently. The company produces gold and platinum group metals, and is the world’s third largest primary producer of platinum.

Lonmin, however, has been having financial difficulties for years, and its share price slide has continued right up to the middle of August this year. But progress towards last December’s all-share takeover approach from fellow South African producer Sibanye Gold (trading as Sibanye-Stillwater), the biggest producer of gold in the country, has helped boost the shares by nearly 40% since then.

Though the takeover has been given the green light by South African regulators, it’s not a done deal. But a refinancing transaction revealed Monday should enable to firm to deal with one of the obstacles standing in the way. Last year, Lonmin breached its covenants on a $150m loan, though lenders chose not to pull the plug.

Staying afloat

Now a $200m loan from Jiangxi Copper Company of China, which will be repaid mainly in platinum and palladium, will be used to settle that debt and provide operational funding.

A fourth quarter update the same day showed an improvement in net cash to $114m at 30 September, from $102m a year previously. And platinum sales of 681,580 ounces beat expectations of 650,000 to 680,000 ounces.

Whatever happens with the takeover, Lonmin shareholders need to be aware that Sibanye does not have a UK listing for its shares. It does have ADRs listed on the NYSE, so check carefully what you’d get.

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Alan Oscroft 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.

Sibanye Gold, which is trading under the name Sibanye-Stillwater, is offering 0.967 new Sibanye-Stillwater shares for each Lonmin share. Based on the 30 trading day volume weighted average price of Sibanye shares, the offer values each Lonmin share at 100p for a total value of £285m (according to this morning’s press release). 

Commenting on the proposed merger, Ben Magara, Lonmin’s CEO said: “The combination with Sibanye-Stillwater provides a stronger platform for Lonmin Shareholders and other stakeholders to benefit from the long-term upside potential of an enlarged Sibanye-Stillwater group with greater geographical and commodity diversification.“

Time to buy? 

Even though shares in Lonmin have jumped by around 20% this morning after the announcement, I believe that there could be an interesting opportunity for investors. 

It has been hamstrung in recent years by a weak balance sheet and lack of scale. Indeed, the company has raised about $1.7bn from shareholders in the past eight years, and profits have collapsed as management has struggled to restructure the business. Meanwhile, Sibanye has been busy buying up platinum mines. 

In 2015, Sibanye agreed to buy Aquarius Platinum Ltd then it gobbled up some high-cost platinum mines from Anglo American Platinum Ltd. A year later, the acquisition of Stillwater, the only palladium and platinum producer in the US was announced. These deals have left it with high levels of debt, but they’ve allowed the group to achieve scale in the platinum business, something the acquired entities never had. 

This is why I’m positive on the deal. Not only are the shares still trading at a discount to the offer price, but investors who buy-in will end up owning a stake in what will become the world’s most dominant platinum miner. 

What could go wrong?

Even though the outlook for the enlarged group seems attractive, this might not be the best opportunity for all investors. As Lonmin has shown over the past few decades, platinum mining is not a risk-free business and there’s plenty that could go wrong. For example, Sibanye’s high level of debt has forced the group to cancel its dividend payout. 

Still, the merged entity will have scale on its side, which should allow it to succeed where others have failed. 

So overall, if you’re looking for an attractive play on the price of platinum, buying Lonmin ahead of the merger might be a good idea (or hold on if you’re already invested). On the other hand, if turned off by the risks of platinum mining, it might be better to take the cash and run.

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Platinum miner Lonmin (LSE: LMI) has been forced to raise fresh cash from shareholders three times in the last eight years. While most big miners have returned to profitability over the last two years, Lonmin has not been able to do this.

Why are things so bad?

In August, it announced an operational review to try and address the problems caused by the “adverse macroeconomic conditions” and “inflationary cost pressures” facing platinum miners in South Africa.

It plans big cuts to future spending and hopes to be able to sell or share some of its assets to improve cash generation.

But the harsh reality is that not all South African platinum miners are losing money. Rival Anglo American Platinum managed an operating profit of around $50m on sales of $2bn during the first half of 2016. Lonmin generated an operating loss of $181m on revenue of $486m during the period.

A particular problem is that many of the group’s mine shafts are old, deep and expensive to operate.

Likely to be a value trap

We don’t yet know much about last year’s trading, as the firm’s full-year results — which were scheduled for 13 November — have been delayed. That’s worrying in itself, as was the firm’s decision to secure a pre-emptive waiver on some of its banking covenants earlier this year.

I think investors should be cautious until we know more. With the stock trading at an 80% discount to its book value of around 325p, the market is pricing-in further problems.

Lonmin may make it back to profitability, but I think it could end up being broken up and sold piecemeal, with very little value returned to shareholders.

The next big retailer to fall?

When Mothercare (LSE: MTC)  published its half-year results on 23 November, the retailer’s share price fell by nearly 20% in one day. The shares are now worth 43% less than they were six months ago.

Unfortunately, this turnaround story appears to be faltering. Mothercare’s underlying operating margin fell from 2.2% to just 0.3% during the six months to 7 October. As a result, the group slipped to an adjusted pre-tax loss of £0.7m for the half year, compared to a profit of £5.9m for the same period last year.

Restructuring costs and other one-off costs are also draining cash from the firm. Net debt has risen from £15.6m to £37.6m over the last year.

The group says that there has been a “softening in the UK market” in recent weeks, while “weak trading in the Middle East” is dragging down its overseas business. Analysts have cut their forecasts and now expect the group to report a profit of just £13m for the current year.

That puts the stock on a forecast P/E of 13, with profits expected to rise next year.

My concern is that in the UK at least, many of Mothercare’s type of products are either sold cheaply by supermarkets or face intense price competition online. This firm used to fill a clear niche in the market. I don’t see this anymore. I think there’s a real risk this retailer could end up going under.

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With that in mind, here are two companies that have experienced a difficult recent past but which could post high returns in the long run.

Improving outlook

Releasing a production update for the second quarter of the year on Tuesday was Vedanta Resources (LSE: VED). The company’s operational performance during the period was relatively robust. Refined zinc-lead metal production rose 27% versus the same quarter of the previous year, while refined silver production was at a record level, which was 31% higher than last year.

The company also posted record aluminium production as well as record quarterly copper cathode production. Its oil and gas division also made progress, with the company commencing a 15-well infill drilling campaign at Mangala.

With Vedanta having returned to profitability last year after two years of losses, the company now seems to be on track to deliver improved financial performance. Next year, for example, it is expected to record a rise in its bottom line of 59%. This puts its shares on a price-to-earnings growth (PEG) ratio of just 0.2, which suggests that it offers significant upside potential.

Furthermore, the company is expected to have a dividend yield of 4.2% from a dividend which is due to be covered 2.7 times by profit. This suggests that additional dividend growth could be on the cards. As such, while commodity prices will inevitably fluctuate over the medium term, Vedanta appears to have significant investment potential in the long term.

Turnaround potential

Also offering upside potential in the long run is platinum producer Lonmin (LSE: LMI). The company has not yet been able to return to profitability after a challenging period that has seen the price of platinum come under pressure. Concern about the future use of diesel cars means demand for the commodity has fallen, and this means that Lonmin is forecast to remain in the red over the current year and into next year.

Despite this, the company could have investment potential. It has a sound turnaround plan which is aiming to make the business more efficient. In addition, it has recently acquired the Pandora JV and has been able to obtain a potential waiver of its banking covenants in the short run. This move could provide the company with some breathing space while it implements its strategy and may lead to improved financial performance in future.

While Lonmin is clearly a relatively risky stock to own, it has the potential to deliver improved share price performance through a mixture of cost cuts and growth prospects.

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Today I’ll explain why I still don’t think that Lonmin stock is cheap enough to buy. I’ll also take a look at a second company which could prove to be a value trap for investors.

Costs are still too high

Lonmin’s share price has fallen by 45% over the last year, as concerns about the group’s future grow. At about 110p, the stock now trades at just 25% of its tangible net asset value of 434p. This might look like a bargain, but there’s a good reason for the market’s caution. The firm hasn’t made a profit since 2013, and it could run out of cash (again) in the next few years.

Revenue fell by 6% to $486m during the first half, despite the US dollar price of platinum group metals (PGM) rising by 8% per ounce. The problem for Lonmin is that as PGM prices have risen, the South African rand has gained strength against the dollar. The effect of this has been to cancel out any potential gains from higher prices.

Production losses earlier this year and the stronger rand have forced it to increase its full-year cost forecasts. The miner now expects unit costs to range from R11,300 to R11,800 per platinum group metal (PGM) ounce this year, up from R10,800 to R11,300 previously.

Given that the group’s average sale price was R10,852 per PGM ounce during the first half, Lonmin seems likely to report a significant operating loss this year. This could be a problem as its net cash balance was just $75m at the end of March, down from $173m at the end of September.

In my view, it’s not clear whether it will be able to return to profit quickly enough to avoid running out of cash. For this reason, I believe this stock remains one to avoid.

A 9% dividend yield?

Interiors and fashion retailer Laura Ashley Holdings (LSE: ALY) remains profitable and pays a generous dividend. But the group faces an uncertain outlook.

Like-for-like retail sales fell by 3.5% during the first half. This contributed to a 30% slump in pre-tax profit, which fell to £7.8m. The interim dividend was cut by 50% to 0.5p.

Analysts expect full-year earnings to fall by 50% to 1.2p per share this year, putting the stock on a forecast P/E of 11. This suggests to me that 2017 forecasts for a total dividend of 1.25p per share carry some risk. This payout would give a massive dividend yield of 9.3%, but would not be covered by earnings. That’s a classic recipe for a dividend cut, especially as Laura Ashley’s net debt rose from £3.7m to £25.1m last year.

I could be wrong. Management may yet pull off a turnaround and save the dividend. But as things stand, I think there’s a real risk that Laura Ashley could be a value trap — a stock that’s cheap for a good reason.

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Roland Head has no position in any 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.

Making progress 

During the past year, Jubilee has transformed from a struggling speculative miner into a cash cow with bright prospects. Even though the company reported a loss for its financial year when it announced the figures at the end of last year, according to chairman Colin Bird, the firm earned a total of £2.3m during the third calendar quarter of last year, which fell just outside the end of the fiscal year. 

Income from a full year of tailings processing at Jubilee’s flagship Dilokong mine is likely to come in at between $8m and $10m. The nearby Hernic mine is set to come on-stream as well in the near term, which will add a similar-sized contribution to the group’s bottom line. 

On top of the two South African chrome and platinum projects, Jubilee announced today that it had inked a deal to process copper tailings from Resilience Mining Australia’s Leigh copper mine. RMA will receive A$8m payable in stages and dependent on certain milestones being hit. 

According to today’s press release on the matter, the project has potential production of 12,000 tonnes of copper at a production cost of US$2,569/t compared to a current price of $6,000/t. With such impressive economics, it’s no surprise Jubilee expects the project to be cash flow positive within six months. 

Finding a value 

City analysts are not yet covering the company, so it’s difficult to try and place a value on the shares. However, considering the income projections above, and Jubilee’s current market capitalisation of £60m, it looks as if the company could be undervalued considering its potential. 

As an estimate, if income for the Dilokong mine comes in at $9m for the full-year, that’s earnings of around £7m, excluding income from any other sources. Put simply; it looks as if the company is trading at less than 10 times earnings. 

Tricky business 

Jubilee’s move into the tailings business comes after the company’s unsuccessful venture into deep-level platinum, a business Lonmin (LSE: LO) knows is fraught with risks. 

Lonmin and Jubilee’s fortunes could not be more different. As shares in Jubilee have rocketed over the past two years, Lonmin has lurched from one disaster to another, and over the previous five years, the shares are down by 99.9%. 

It looks as if there could be further declines to come as well. For the three months to the end of December, the company reported lower production volumes and higher costs, exactly the opposite of what management wanted to achieve.  

Management had promised shareholders lower costs and higher production volumes to promote the last equity fund raising. The question is, for how much longer will major shareholders be willing to support the company? 

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A reinvented miner

In the past year, Lonmin‘s (LSE: LMI) share price has risen 115%. That’s 92% higher than the FTSE 100’s performance and key to this has been the company’s successful strategy. First of all, Lonmin put together the cash resources required to not only survive lower commodity prices, but also to build a better business. Although its fundraising wasn’t taken up in full by investors, it nevertheless allowed the company to invest in order to generate efficiencies, become more streamlined and more profitable.

In fact, in the current year Lonmin is forecast to reduce its loss per share from over 27p to less than 5p. Next year, it’s expected to record a profit on a per share basis, which has the potential to boost investor sentiment in the stock as the market begins to price-in improved performance. And with an improved business model, a rising bottom line looks relatively likely over the medium term.

Certainly, Lonmin remains highly dependent on commodity prices, and they will have a major impact on its future financial performance. However, with net assets of £1.15bn and a market capitalisation of only £373m, the company offers a large margin of safety, which indicates now could be a good time to buy it.

A fast-growing miner

Also making major changes to its business model in the last couple of years has been Anglo American (LSE: AAL). Its shares have risen by 273% in the last year as it has streamlined its divisions through asset disposals, improved the quality of its asset base and invested where necessary in order to create a more enticing long-term growth profile.

These changes seem to be paying off. Anglo American is forecast to record a rise in its bottom line of 57% in the current year. If met, this would put it on a price-to-earnings (P/E) ratio of just 7.3. This would indicate major upside, since its shares could double and still not appear to be overvalued. Like Lonmin, Anglo American’s outlook is, of course, highly dependent on the performance of commodity prices. However, with a relatively well-diversified business model and improving finances, it seems to offer a sufficiently wide margin of safety to merit investment.

Clearly, the company’s shares are likely to be volatile over the next year and the outlook for the world economy could change. But for investors who are able to focus on the long term and live with a rapidly changing share price in the short run, Anglo American could be an excellent buy.

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The question for investors is whether these stocks are value buys with the potential to deliver multi-bagging gains, or slow-motion disasters.

Down but not out?

The market’s reaction to today’s trading update from South African platinum miner Lonmin (LSE: LMI) was decisive. The shares are down by 13% to 154p at the time of writing and are now trading 39% below last year’s 52-week high of 252p.

In my view, today’s news makes it clear why 14 City brokers currently rate this stock as a sell.

Production fell by 7.8% at the Marikana mine during the three months to 31 December. Lonmin says that planned changes to improve productivity are taking longer than expected. A particular problem area is the mine’s biggest shaft, K3, where output fell by 13.8%, to 590,000 tonnes.

Today, the company admitted that “the relationship between operational management and unions at this shaft is not working as effectively as we expected”. Additional crews have now been assigned to work at K3, which is expected to increase the cost per tonne.

Still losing cash

Lonmin shares currently trade at a 63% discount to their net asset value of 422p per share. But today’s update warned that, as things stand, the company is still operating at a cash loss. The group’s remaining net cash balance of $49m could soon disappear.

Last year’s restructuring plan has not yet managed to bring the group back into profit. There may still be an opportunity here for bold investors. But for me, there are too many risks and uncertainties. I’m going to stay away.

A rapid profit opportunity?

Cameroon-focused oil and gas explorer Bowleven (LSE: BLVN) has a couple of decent assets and net cash of $95m. Life should be good for shareholders.

The problem is that while the group’s well-paid board continues to evaluate “new venture opportunities”, shareholders have become unhappy at the firm’s refusal to return some of its cash to them. Many long-term investors are also frustrated that Bowleven has not made more rapid progress with its Bomono and Etinde assets.

This situation has now come to a head. Hedge fund Crown Ocean Capital P1 Ltd — which controls around 13% of Bowleven stock — has called an EGM to try and sack Bowleven’s board of directors. A number of other significant investors are said to have indicated they will vote with Crown Ocean, including a shareholder action group made up of private investors.

Shares could rally

Bowleven’s directors seem unlikely to back down gracefully. But if Crown Ocean does manage to remove them from the board, I’d expect the firm’s shares to rally sharply.

The hedge fund’s nominated directors would be likely to use some of the group’s cash to fund a special dividend for long-suffering shareholders. I’d also expect them to sell or farm out a stake of the Etinde field, in order to speed up the appraisal of this asset.

Both of these measures could deliver significant gains for investors from current levels, which is why I rate Bowleven as a speculative buy.

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Lonmin’s reorganisation has resulted in a company that’s cash flow positive and on track to return to profitability in 2017. In the 2016 financial year, its operating profit improved to $7m from a loss of $134m in the previous year, while net cash improved from $69m at the end of the first quarter to $173m by the year-end.

Its guidance of sales of 700,000 platinum ounces was exceeded, with Lonmin selling 735,747 platinum ounces in the year. This was supported by its smelter clean-up and metal release from improved processing technology. Lonmin also achieved a cost reduction of R1.3bn, which is 86% higher than its target of R700m.

Looking ahead, Lonmin expects to record platinum sales of between 650,000 and 680,000 ounces in 2017. Although it expects unit costs to remain under pressure, Lonmin is forecast to record a black bottom line in 2017 for the first time in three years. This has the potential to significantly improve investor sentiment in the stock, since it would represent tangible evidence that Lonmin’s turnaround is having a positive impact on its financial performance.

Better insulated?

Certainly, Lonmin will be highly dependent on the price of platinum in future. In this sense, it arguably has a higher risk profile than a more diversified sector peer such as BHP Billiton (LSE: BLT). It produces a range of commodities, such as oil, iron ore and copper. Therefore, BHP Billiton is better insulated from the potential volatility within commodity markets over the medium term.

And BHP Billiton is also in the process of reorganising its business. It has made several asset disposals as it seeks to strengthen its balance sheet and create a more focused and efficient business. BHP Billiton has been able to reduce costs significantly so as to make it increasingly competitive versus its sector peers and this bodes well for the company’s financial future.

In fact, BHP Billiton is due to record a rise in earnings of 254% in the current year. This has the potential to significantly improve investor sentiment in the company and shows that BHP Billiton’s strategy is having a positive impact on its financial performance. And with it having a lower risk profile thanks to its stronger balance sheet and better diversified business, BHP Billiton seems to have greater appeal than Lonmin for the long term.

Of course, Lonmin remains a sound buy, which could be set for significant share price gains. Therefore, its performance could be surprisingly strong in 2017 and mean that for less risk-averse investors, it’s a sound buy at the present time.

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Peter Stephens owns shares of BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Strong recovery

You could be forgiven for seeing an investment in BHP Billiton (LSE: BLT) five years ago as having been a disaster, with the share price down 36% over that period. But that’s reckoning without dividends, which would have brought you a 47% total yield to put your investment in profit overall — not too disastrous for one of mining’s darkest periods.

We’ve also seen a recovery of late, with the shares up 89% since 20 January, to 1,100p — and that includes a 4.6% gain today, putting BHP among the day’s biggest risers.

After an 80% fall in EPS for the year ended 30 June, BHP’s earnings are expected to improve dramatically in the coming 12 months with a 123% gain predicted. It would still leave the shares on a high-looking P/E ratio of 28, but that’s a big improvement on the trailing multiple of 54 produced by this year’s results. And if we really have seen the start of a mining recovery, the P/E could tumble in the coming years.

The much-feared Chinese slowdown looks to be petering out, so that’s one good sign. Then we have the likelihood of economic stimulus policies being continued for quite some time — across Europe as the eurozone can’t shake off its weakness, in the UK following the Brexit vote, and in the US where it looks like a freer economic approach is the order of the day.

That all makes me feel positive towards a diversified miner like BHP Billiton for the next five years, though the real time to have picked the recovery was around six months ago.

Back from disaster

The share price performance at platinum group miner Lonmin (LSE: LMI) over five years has been far worse. We’re looking at a 97% fall, but without the dividends that saved the day for BHP Billiton investors — Lonmin canned its annual payouts in 2012, and there are only tiny 0.1% yields on the cards for this year and next.

But the price recovery since 21 January has been dramatic — with a 7.8% rise today to 200p, the shares have soared more than fivefold from 36.75p. Is that a sign that it’s time to pile in?

I have my doubts. On the plus side, the company has transformed itself impressively with some serious cost-cutting bearing fruit, it has come through a successful fundraising, and at March’s interim stage it was able to report net cash on its books of $114m (from a net debt of $185m at the end of September 2015).

But we’re not expecting to see any return to profit before 2017, with the year ending September 2016 expected to bring an (admittedly small) loss — results are due in November. The forecast P/E of 71 based on 2017 forecasts looks eye-watering, but in a turnaround year it doesn’t really mean much.

But even with that in mind, I think it’s just too early to evaluate the long-term success of Lonmin’s recovery, and the massive share price rise this year has taken away the safety margin that I’d like to see at this stage.

The post Should you buy today’s big mining winners? appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.