The last couple of years have been a wild ride for mining investors. But I believe we’re now in a position to buy good mining stocks at attractive prices, without excessive risk.
Today I’m going to look at two stocks I believe could help you to build a market-beating retirement portfolio. There’s a mix of growth and income on offer, plus the potential for further steps up in profit.
Just too profitable?
Central Asia Metals Ltd (LSE: CAML) operates a copper project in Kazakhstan. The company has an unusual problem. It’s too profitable. Almost any new project would dilute the rates of return the company generates from its ultra-low cost Kounrad project.
In 2016, the firm’s copper production rose by 16% to 14,020 tonnes. Revenue of $66.7m generated an operating profit of $33.0m, giving a stunning operating margin of 48.7%.
Shareholders will reap the benefit of this strong performance. As much as 31% of last year’s revenue will be returned to shareholders by way of a total dividend of 15.5p. This gives a yield of 6.7% at the current share price of 229p.
This isn’t a one-off performance. The company’s dividend policy is to return at least 20% of revenue from Kounrad to shareholders each year. Central Asia Metals floated in London in 2010. By September 2015, the group had already returned the entire amount it raised in the IPO to shareholders through dividends and share buybacks.
Although Kounrad won’t last forever, in 2016 the company completed the majority of an expansion project that should allow the mine to remain in operation beyond 2030.
Central Asia’s shares trade on a 2017 forecast P/E of 10.2 with a prospective yield of 6.2%. In my view any downside risks from copper prices or exchange rates are limited, given the firm’s profitability and cash generation. I believe the stock remains an attractive buy.
A more diverse choice
If you’re concerned that Central Asia Metals relies too heavily on just one asset, then you might want to consider the more diverse charms of BHP Billiton (LSE: BLT). This FTSE100-listed mining giant offers exposure to copper, coal, iron ore and oil, among others.
The group profited from the rapid rebound in iron ore and coal prices last year and is also benefiting from a stronger copper market. These commodities continue to look attractive in 2017.
But in my view, the joker in the pack is that the oil market recovery remains at a fairly early stage. If oil continues to climb and reaches $60 per barrel over the next 12-18 months — as I expect — then BHP’s petroleum-related profits could rise significantly.
In the meantime, the financial fundamentals look strong. Net debt fell from $26bn to $20bn last year and further debt reduction is planned. The group’s free cash flow has recovered and comfortably covers the dividend.
BHP shares have pulled back by about 15% from the highs seen at the start of this year. This has left the stock trading on a 2017 forecast P/E of 10 with a prospective yield of 5.7%.
I believe this could be a good entry point for a long-term buy.