KAZ Minerals (LSE: KAZ) has been a champion of the mining sector over the past couple of years, as its share price has soared by a whopping 900% since a low in November 2015.
That’s not surprising, as the Kazakhstan-focused copper miner has managed to turn from a loss in 2014 into a highly-profitable operation in the year just ended December 2017.
Full-year copper sales volume climbed from 141kt in 2016 to 256kt, and thanks to the recovery in the price of the red metal over the past 12 months, that’s translated into a more than doubling of gross revenue, to $1,938m from $969m.
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And with the firm’s low cost of production, that’s geared up to a soaring of gross EBITDA from $492m to $1,235m — which represents a rise in KAZ’s gross EBITDA margin from 51% a year previously to 64%. Operating profit more than trebled to $715m, and free cash flow came in at $452m (from a prior outflow of $60m).
Copper output is expected to grow modestly in 2018, at 270-300kt, as slightly lower copper grades should offset an even bigger increase in ore tonnage.
Mind the debt
That’s an impressive performance, but why would I sell? As I highlighted when I last examined KAZ Minerals, I’m troubled by the company’s debt.
The figure is actually still coming down, dropping from $2.7bn at the end of 2016 to a shade over $2bn at December 2017. But it still represents around 40% of the company’s market capitalisation, and takes the shine off a forward P/E of 8, suggesting a debt-free equivalent of more like 13.
Still, debt to gross EBITDA has come down to 1.7 times, and that’s looking manageable. But I just see less risky mining investments out there.
Resurgence
My money would be more likely to go on mining giant Anglo American (LSE: AAL), whose shares have almost quadrupled in the past two years.
They did drop a bit on the release of 2017 results, losing 2.5% by early afternoon to the 1,750p level, despite debt being slashed and the dividend pushed up to its highest level in a decade.
With commodities prices strengthening across the board, the company enjoyed a 45% rise in underlying EBITDA to $8.8bn, which led to a doubling in earnings per share to $2.48.
With no dividend having been paid for 2016, the latest payment of $1.02 per share provides a yield of 4.2% on the current share price, and it’s well covered by earnings.
Debt almost halved
The reduction in net debt is impressive, with a 47% cut taking it down to $4.5bn. That might sound like a lot, but it’s only a little over 50% of underlying EBITDA, and that means Anglo American is really not facing any liquidity problem.
The only downside I see at the moment is a couple of years of fallbacks in EPS, with drops of 5% and 17% on the cards for this year and next. But that would still leave the shares on a 2019 P/E multiple of around 12, and I don’t think that’s stretching, especially not with dividends back up around the 4% mark.
Longer term, I see the restructuring undertaken by the company during the downturn, including the disposal of some non-core assets, as having left Anglo in a better position for continuing its cash flow recovery and maintaining that attractive dividend.
The sector will continue to be cyclical, but Anglo American is definitely my pick of these two
