In a bullish trading statement this morning, mining royalty company Anglo Pacific Group (LSE: APF) said it expects royalty income to be “considerably higher than previous expectations” in 2016.
Anglo Pacific shares have risen by 118% so far this year, but they were broadly flat after today’s news. What this tells me is that today’s news was already in the price.
When a company’s share price doesn’t respond to upgraded guidance, it’s often worth taking a fresh look at its valuation. In today’s article I’ll do just that. I’ll also ask whether another of this year’s big mining winners, BHP Billiton (LSE: BLT) is starting to look fully priced.
A lucky escape?
Anglo Pacific’s income comes from royalty stakes in other companies’ mines. The group has heavy exposure to coal, which has pushed down earnings over the last couple of years.
Coal prices have risen sharply this year, due to Chinese supply cuts. According to Anglo Pacific, spot prices for coking coal prices have risen by 229%, while thermal coal has gained 110%. This has resulted in a dramatic increase in royalty income. Whether this is a lucky escape or due to good judgement is debatable. But the results are certainly real.
Anglo Pacific said today that it now expects this year’s dividend to be covered by earnings. A payout of 6p per share is forecast for this year, giving a prospective yield of 4.8%. This payout should now be safe and affordable, without any further increase in debt.
If we assume that Anglo Pacific will report earnings of 6p per share this year, then the shares trade on a forecast P/E ratio of 21. Earnings and the dividend are expected to rise further in 2017, giving a forecast P/E of 14 and a 4.9% yield.
My view is that high coal prices are now factored-into market forecasts. The outlook for the group’s non-coal assets seems less spectacular. I’d rate Anglo Pacific as a hold at current levels.
Can this big beast double again?
Shares of BHP Billiton have now doubled from their January low of 580p. It’s been a remarkable turnaround that’s been helped by rising commodity prices and the weaker pound.
However, the shares are still around 35% below the 1,900p level at which they traded from late 2011 until mid-2014. Is it reasonable to expect a return to these heights at some point? BHP shares currently trade on 19.5 times 2016/17 forecast earnings and offer a prospective yield of 3.1%. That looks about right to me, but the company does have two killer attractions that could push the share price higher.
The first is that free cash flow of $7bn is expected during the 2016/17 financial year. With the shares at 1,200p, that gives a price/free cash flow ratio of 12. That’s pretty cheap.
The second attraction is that broker forecasts for BHP’s earnings per share have risen by 60% since August, and have doubled since January. Further upgrades are possible, which could push BHP shares even higher.
As a shareholder myself, my view is that most of the likely good news is now reflected in BHP’s share price. The one-off factors that have boosted earnings this year won’t necessarily be repeated, so I rate BHP as a hold.