Buying mining shares may seem like a risky move. After all, the sector has endured one of its toughest periods in memory during the last few years. However, mining shares may now offer a sound long-term investment outlook. In many cases, their valuations remain relatively low and therefore have high capital growth potential. And with improving financial performance potentially ahead, their chances of helping you retire early could be surprisingly high.
Improving performance
One mining company that could help you retire early is iron ore miner Ferrexpo (LSE: FXPO). It released upbeat results on Wednesday which showed it made progress with its strategy in 2016. For example, it was able to increase its net cash flows from operations by over 1.5 times to $332m at a time when the iron ore price was at its lowest level for eight years. This allowed the company to reduce its financial leverage and strengthen its balance sheet. In turn, this means that its risk profile may now be substantially lower.
Ferrexpo’s results also included news of a recommencement of dividends. Although they amount to just $0.066 per share including special dividends, it puts the company’s shares on a yield of 3.2%. Furthermore, it indicates that the company’s management team has confidence in its future outlook, which could spur investor sentiment higher.
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Looking ahead, Ferrexpo is forecast to record a rise in its bottom line of 54% in the current year. This puts its shares on a price-to-earnings growth (PEG) ratio of only 0.1, which indicates they offer a wide margin of safety. While the outlook for iron ore remains decidedly uncertain, Ferrexpo’s low valuation and growth potential could mean it records high share price gains in the long run.
Improving business
Also improving its financial strength in recent years has been Glencore (LSE: GLEN). Its shares have more than doubled in price in the last year, with reduced leverage and a more sustainable business model being key reasons for this. And while the company has not yet reached the end of its turnaround plan, it seems to be well on its way to doing so.
Of course, Glencore remains a relatively well-diversified resources company. This affords it greater protection against price declines of one or a group of commodities. Therefore, it could be argued that its shares deserve to trade at a premium to those of pureplay sector peers. As such, a price-to-earnings (P/E) ratio of 12.6 appears to represent fair value given the company’s improving business model and performance.
Glencore is expected to reinstate dividends this year. This could improve investor sentiment in the stock as it shows a degree of confidence from the company’s management. In fact, Glencore could become an attractive income stock over the medium term, since it is expected to yield 4.1% in 2018. With inflation potentially heading higher, demand for the company’s shares could spike over the next couple of years.
