If your goal is to maximise the total return from your portfolio, in dividends and capital gains, then today’s market presents some tempting opportunities.
For example, struggling platinum miner Lonmin (LSE: LMI) could deliver a rapid, multi-bagging gain for shareholders — if it can refinance its debt and find a way of returning to profit.
In contrast, BP (LSE: BP) now offers a yield of more than 7%, plus the possibility of more modest capital gains.
It’s worth considering which of these firms could deliver the biggest profits for investors, and why.
Lonmin
Shares in Lonmin missed out on Thursday’s rally, despite the firm issuing a progress update on its turnaround plans.
The problem was that the update, while positive, did not show any real progress on the two issues that really matter at Lonmin: debt refinancing and operating profit.
According to today’s update, Lonmin’s underlying casts costs have fallen to R10,499 per platinum group metal (PGM) ounce. This compares to an average market price in the third quarter of R10,800 per PGM ounce.
Although this is positive, I doubt that it’s anywhere near enough to enable Lonmin to cover its operating, corporate and debt costs.
Lonmin also said it has appointed a finance specialist, Ron Series, as an advisor. Mr Series’ brief is to help Lonmin reduce capital expenditure and maximise cash generation from its readily available ore reserves.
I’m only guessing, but my feeling is that Mr Series’ appointment may have been suggested by the firm’s lenders.
Back in May, Lonmin had already used up $282m of its $563m credit line. Things aren’t likely to have improved since then and cash could be very tight. Lonmin has promise an update on refinancing by November, and I suspect things are getting desperate.
That’s the bearish view, but there is a bullish case, too. Lonmin plans to eliminate 100,000 ounces of higher cost production over the next couple of years. This should bring down average production costs sharply and should help the firm generate more cash flow.
If Lonmin can show investors a path to recovery without needing to raise too much fresh cash, the share price could easily double by the end of 2015.
BP
A doubling of the share price is something that won’t happen at BP.
In a best case scenario, the oil price will recover faster than expected and BP won’t need to cut its dividend. If this happens, I reckon BP shares could offer perhaps 20-30% upside over the next 12-18 months.
On the other hand, unlike Lonmin, BP won’t go bust. There is very little risk that it will have to raise new funds from investors. Even if BP’s dividend is cut, it’s unlikely to be cancelled altogether, in my view.
How to maximise total returns
BP is a safe income buy that is almost certain to deliver a positive total return over the next few years. Lonmin may not. A total loss is a real possibility.
In my view, Lonmin is too risky for anyone nearing retirement, but a top-up of BP could make good sense.
On the other hand, for investors who don’t need to draw on their portfolio for the foreseeable future, a small investment in Lonmin could prove very profitable. Just don’t invest money you cannot afford to lose.