The global rout in commodity markets has hit Anglo American (LSE: AAL) and Amur Minerals (LSE: AMC) hard over the past three months. Indeed, since mid-July, Anglo and Amur’s shares have declined by 23% and 38% respectively. Over the same period, the FTSE 100 has declined by 6%.
However, for the astute value investor, these declines have presented an interesting opportunity.
Risk/reward
Being a successful investor is all about limiting risk and maximising gains. A key part of this is the risk/reward ratio.
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Simply put, the risk/reward ratio measures how much an investor stands to make, compared to the amount they’re risking. For example, a risk/reward ratio of 2:1 is highly attractive as it means that investors stand to double their money if the investment works out. Although, if the investment doesn’t work out, investors may stand to lose 100% of their capital.
Both Amur and Anglo have now fallen to levels at which the risk/reward looks attractive.
Plenty of potential
Amur is pursuing the development of its flagship Kun-Manie mine, one of the largest nickel reserves in the world. Figures suggest that the Kun-Manie mine has a net present value of between $0.71bn and $1.44bn, which implies that Amur could be set for a bumper payday if management can find a buyer for the mine, or develop the mine itself.
The company recently reached an agreement with the Russian Government’s Far East and Baikal Region Development Fund, which was established to stimulate economic development and can deploy federal financing earmarked for infrastructure development.
Construction costs are estimated to be $1.4bn over a two-year period, so Amur needs to find a partner if it wants to develop the mine. Still, with a net present value of at least $0.71bn (£0.46bn), Amur’s shares are set to rocket if Kun-Manie starts moving forward. With 438m shares in issue, Kun-Manie’s net present value per Amur share is 105p per share, a risk/reward ratio of 9:1.
On the rebound
Anglo is one of the few miners that’s taking drastic action to cut costs and adjust to the current commodity price environment.
The company is planning to lower costs by $1.5bn per annum over the next 18 months. 6,000 jobs will go as part of this plan, and around $400m per annum will be saved by improved operational productivity.
Not only will these plans help Anglo weather the storm in the short term, but they should also help the company improve its long-term results. As a result, when the commodity market starts to rebalance, Anglo will be extremely well positioned to profit from the rebound.
Overall then, Anglo’s aggressive restructuring is creating a business with an extremely attractive outlook for long-term investors. And if the company’s shares return to just 1,200p, investors stand to double their money — a risk/reward of 2:1.
If you include Anglo’s 8.1% dividend yield in this calculation, the company looks even more attractive.
