If you’re thinking of investing in a mining giant like Anglo American (LSE: AAL), you need to be able handle the short-term risks. There’s no product differentiation and prices are fixed by world markets, which means a miner really can’t have any competitive edge over other producers.
Market prices are erratic, which makes profits, dividends and therefore share prices volatile.
But over the long term, a business producing things that the world simply cannot do without has to be a good defensive one. And miners can be cash cows too, over the long term.
Production
In Q4, Anglo’s copper production was up 23%, diamond output from De Beers was up 12%, and metallurgical coal rose by 15%. The only major product to drop in volumes was iron ore from Kumba, down 13%. But overall it was, as chief executive Mark Cutifani said, another strong quarter.
Over the past couple of years, the Anglo American share price has recovered from a cyclical downturn in commodities prices. And in my view, when metals and minerals are cheap and mining shares are down, that’s the best time to buy — every down cycle in my lifetime has always come back up again and depressed share prices have alway recovered.
What about now?
The share price rise has flattened-off over the past 12 months with small falls in earnings on the cards, but that’s left the shares offering forecast dividend yields of around 4.4%. I reckon that’s good value, though I’d suggest only buying if you’re looking at holding for at least 10 years.
More volatile
Shares in Kaz Minerals (LSE: KAZ) have been even more erratic over the past few years, and are trading well below their big 2018 spike.
An acquisition in Russia, growing threats of international trade wars, and the general world economic climate all appear to be adversely affecting sentiment towards the copper miner. But it’s still getting the stuff out of the ground, with the firm’s Q4 update showing total copper production for 2018 up 14% to 294.7 kt.
The company also produces metals found alongside copper, though zinc production dropped by a similar 14% to 49.7 kt. Gold and silver output were both up slightly.
Ten years
Chief executive Andrew Southam pointed out that 2018 was the 10th year in a row that the company has met its copper production targets, thanks to the development of its Bozshakol and Aktogay projects in Kazakhstan.
Earnings are predicted to be relatively flat over the next couple of years, but KAZ is expected to be paying dividends — albeit modest ones yielding around 1.5% at this stage, though covered around tenfold by earnings.
Low valuation
The current valuation puts the shares on P/E multiples of only around 6.5, which does look very low to me compared to the sector — I expect some discounting due to the cyclical nature of the supply and demand cycle, but not that much.
I also think those earnings forecasts could be too pessimistic. Further growth potential at both Bozshakol and Aktogay could well have been underestimated, and the development of the Koksay resource (also in Kazakhstan, and announced only in June 2018) looks like it could result in a boost to production.
I’m held back by the political aspects of the company, but in valuation terms I like the look of it.