Inflation is probably the most significant threat savers face today. Consumer price inflation in the UK has averaged 2.6% this year, which means that, with the Bank of England base rate at 0.5%, savers are seeing a decline in the purchasing power of their savings of 2.1% per annum.
Investing in stocks is one way you can beat the scrouge of inflation. Commodities can also help immunise your portfolio against price increases as, over the long term, commodity prices tend to increase with inflation. Mining stocks offer the best of both worlds.
Inflation protection
Global mining group Anglo American (LSE: AAL) is an excellent example of a miner that can protect your portfolio from inflation.
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Over the past few years, the company has been restructuring operations involving a debt binge. However, today the company is better positioned than it has been for a long time.
Net debt had fallen to just $4.2bn at the end of 2017, compared to $11.8bn at the end of 2014. Thanks to rising commodity prices, earnings before interest, tax, depreciation and amortisation (EBITDA) jumped 45% to $8.8bn in the 12 months to December 2017.
Going forward, analysts are expecting the group to remain in a holding pattern. EPS is unlikely to grow over the next two years, according to analysts.
Still, I believe Anglo’s $6bn in free cash flow (based on 2017’s numbers) will continue to support the 4.7% dividend yield (costing around $1bn per annum) and allow the group to reduce debt still further. This healthy cash generation also leaves plenty of scope for special dividend payouts.
To help prepare the company for the future, Anglo announced this morning that its subsidiary had committed $100m to two venture capital funds. These have been established to invest in companies that “support the development of innovative and competitive technological uses of platinum group metals,” one of Anglo’s main products.
With cash flowing and dividend growth on the horizon, shares in Anglo look to me to be a steal today, as they’re trading at only 8.5 times forward earnings.
Value investment
Gold miner Petropavlovsk (LSE: POG) is another investment that could protect your portfolio from inflation. But this Russia-focused gold miner is not for the faint-hearted. At the end of June, shareholders voted to change the board for a second time in a year, bringing back co-founder Paval Maslovskiy and former directors Roderic Lyne and Robert Jenkins.
The vote to replace the former management was instigated by two mystery vehicles, CABS and Slevin, which own just under 10% of the group. The owners behind these enterprises believe Maslovskiy is the right man to take the company forward and improve relations with workers.
Management turmoil is never a good thing for companies and, usually, I’d stay away. But in the case of Petropavlovsk, the company’s discount valuation and gold mining expertise excites me.
The firm is building a new plant that will allow it to process more gold. Analysts believe that this new facility will help the group achieve EPS of $0.03 for 2019, up from $0.01 for 2017. Based on these estimates, the stock is trading at a forward P/E of 4.3 and trading at a price-to-book value of just 0.6. In my opinion, the margin of safety offered by this discount valuation more than makes up for Petropavlovsk’s uncertain outlook.
