One of the largest divisions of mining giant Anglo American (LSE: AAL) (NASDAQOTH: AAUKY.US) said this morning that it would not pay an interim dividend.
Kumba Iron Ore has axed its interim dividend after reporting 61% drop in earnings over the last six months. Iron ore prices have fallen from just over $100 to around $60 per tonne over this period. Anglo has a 69% stake in Kumba, meaning that it will be the biggest loser from Kumba’s decision not to pay a dividend.
Although Anglo is not solely dependent on iron ore, earnings from Kumba accounted for 39% of Anglo’s underlying operating profit last year. This looks likely to fall sharply in 2015. In a statement this morning, Anglo said that Kumba’s contribution to Anglo’s earnings was just $192m during the first half of 2015, down by 53% from $409m for the same period in 2014.
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Analysts have cut profit forecasts for Anglo by 23% over the last three months, as coal, iron ore and platinum have fallen in value. Anglo’s shares are now trading at a 10-year low.
Will Anglo cut its dividend? The latest consensus forecasts suggest that Anglo will manage to maintain the payout at $0.85 this year, but if things get worse, a cut would be a near certainty, in my view.
A better alternative?
The problem for mining investors is that the commodity slump is affecting almost every commodity. Copper has fallen by 13% since the start of May to $5,500 per tonne, close to a six-year low.
Platinum has fallen by 20% so far in 2015 and is currently trading below $1,000 per ounce.
Miners are becoming even more unpopular than oil stocks. However, while a final sell-off is still possible, I think we could be getting close to the bottom. On this basis, two interesting alternatives to Anglo are copper miner Antofagasta (LSE: ANTO) and platinum firm Lonmin (LSE: LMI).
Lonmin
Things are pretty desperate at Lonmin. The firm’s shares have fallen by 57% this year and the current share price of 75p is 75% lower than in 1999. Lonmin stock has now fallen by 98% from the all-time high of 4,278p seen in 2007!
Lonmin is battling to find a way of turning around its unprofitable and high-cost platinum mines. The firm currently trades at just 0.23 times its book value, while the $800m or so of cash raised in a rights issue in 2013 has now been spent. Lonmin reported net debt of $282m in its latest accounts.
However, a return to profit is forecast in 2016. The firm could be a classic deep value investment, for brave investors.
Antofagasta
Things are quite different at Chilean copper miner Antofagasta.
Although the company’s shares trade on a forecast P/E of 24, falling to 16 in 2016, this remains a profitable business with no net debt. Antofagasta’s dividend is expected to rise to $0.20 this year, giving a prospective yield of about 2%.
Historically, Antofagasta has been very profitable. The firm’s operating margin was 30% last year, albeit down from an all-time peak of 56% in 2010.
Antofagasta isn’t cheap, but its robust profit margins and strong balance sheet suggest to me that this could be a profitable investment if copper prices start to recover.
