If you’d put £1,000 into FTSE 100 mining group Anglo American (LSE: AAL) at the start of 2016, you’d have nearly £9,000 today, plus dividends. I suspect that’s a rate of return that buy-to-let landlords — who are facing rising costs and stagnant house prices — can only dream of.
Of course, at the start of 2016, everyone was selling miners. Commodity prices had crashed and many firms — including Anglo — had too much debt. So buying the shares required a bold contrarian call.
I managed to buy some at the lows. But although I made a good profit, I failed on the second test and sold my shares too soon. I should have held on.
If I still owned Anglo American shares today, what would I do? And should I consider buying back in after such a strong run?
More to come?
Cyclical businesses can be difficult to value because they often look cheap when profits are near a peak. Miners are particularly difficult because earnings can be extremely volatile, based on the price movements of a few commodities.
Anglo American certainly looks good value based on its 2018 financial performance. The shares trade at 11 times 2018 free cash flow and 10 times underlying earnings. Net debt has been reduced to just $2.8bn, which I think is insignificant relative to last year’s after-tax profit of $3.2bn.
City forecasts suggest that Anglo’s earnings will rise by about 15% this year. My sums suggest that if these forecasts are correct, chief executive Mark Cutifani will have a lot of spare cash to play with after the ordinary dividend has been paid. I think shareholders could see additional returns, either through cash dividends or share buybacks.
In the meantime, I think Anglo American’s 4.8% dividend yield looks fair value. Although I don’t think the shares are in bargain territory anymore, I’d still be happy to buy a few of these for income.
This small-cap has doubled since January
One stock I do already own is small-cap miner Sylvania Platinum (LSE: SLP). This company operates platinum mines and tailings plants in South Africa, which extract platinum group metals from other mines’ waste materials.
Sylvania shares were up by 4% at the time of writing on Monday following, a solid third-quarter update. As a shareholder, I was impressed by the headline figures showing that net profit rose by 33% to $5m during the three months to 31 March. Net cash rose by 17% to $23.7m and now accounts for about 20% of the group’s market cap.
My concern is that this increase in profits seems mainly to be due to a 15% rise in the so-called basket price of platinum group metals (PGM).
PGM prices have spiked higher over the last year in part because of a sharp rise in demand for palladium, which is used in catalytic converters on petrol cars. As European drivers have switched back from diesel to petrol, demand for palladium has spiked.
Sylvania’s production actually fell by 3.5% to 16,256 PGM ounces during the third quarter, due to water shortages and power outages. This has forced boss Terry McConnachie to cut production guidance slightly for the current year, from 73,000-76,000 ounces to 72,000 ounces.
Sylvania Platinum still looks affordable, on 7 times forecast earnings and with a cash-backed 3.6% dividend yield. But I’d be tempted to wait for a pullback before buying. I’d hold.