I don’t know why so many investors are averse to mining stocks. Well actually, I think I do… it must surely be down to the cyclical nature of the sector. And we’re just out of a severe downturn in those cycles.
Shares in Anglo American (LSE: AAL), for example, have only gained around 6% over the past five years, while the FTSE 100 has managed a mediocre-but-still-better rise of 18%.
At its depth in early 2016, Anglo American was a pariah in valuation terms, with the markets close to writing it off completely. But while the company clearly had its problems, including a serious debt pile, that was surely crazily short-sighted.
It is sitting on enormous assets, and a debt-reduction programme saw debt fall to $4.2bn at the end of 2017, from $11.8bn just three years previously. A lot of that was due to a bottoming-out and recovery in global metals and minerals prices, but that was surely always going to happen?
Impressive progress
Anglo gave us a second-quarter update on Thursday which, in the words of chief executive Mark Cutifani “delivered another strong performance, with copper and metallurgical coal in particular driving a 6% increase in production.” He went on to say that “this reflects our consistent and relentless focus on driving efficiency and productivity from our existing world-class asset base.“
De Beers production was up, copper output rose by 12%, iron ore was up 2%, and metallurgical coal production soared by 33%.
And the prices of those things have been climbing as the imbalance in commodities supply and demand has been evening out. Copper has actually dipped in value over the past month or so, but the stuff is still fetching significantly more than it was in 2016’s dip.
Iron ore prices are still a bit low, but up appreciably since their 2015 troughs. Coal prices are coming back too, but just looking at these basic commodities ignores Anglo American’s added attractions.
Versatility
The company is the world’s biggest producer of platinum with around 40% of global output — and that’s not just a shiny magpie metal, it’s something that is very much in demand in industry.
Anglo is also a major producer of diamonds. And while the value of those glittery rocks is very much driven by their cosmetic factor, it’s a tightly-controlled world market that is very effective in keeping prices high. Consumers might not like that and might prefer to see a less monopolist market for diamonds, but that’s the way it is — and Anglo American is doing well from it.
Low valuation
Looking at its recovery, while earnings dipped precipitously to 2015, we’ve been seeing a decent recovery since then. The next couple of years are slated to produce a small fallback in earnings after an impressive two years of recovery, and that might not look encouraging.
But we’re seeing forward P/E multiples of only around 10, which really does not look daunting at all to me.
We should also hopefully see dividend yields of around 5%, which would be more than twice covered by earnings. Sure, there was a short period when the annual cash had to be slashed, but we’re looking at a company than can turn dirt into brass (literally, in one sense), and which is producing stuff that the world will never get enough of.
For long-term income investors, I see good things.
