Is Anglo American plc a buy after reporting a 4% rise in production?
Shares in diversified mining company Anglo American(LSE: AAL) have surged by over 4% today after it issued an upbeat third quarter production report. But does this mean that its shares are a buy for the long term?
Anglo American's operational improvements continued in Q3. The company is rapidly improving after enduring a challenging period, becoming more efficient and streamlined following a major restructuring programme.
Its production increased in the quarter by 4% on a copper equivalent basis versus the same quarter of the previous year. This represents a 12% rise versus this year's Q2. It includes a rise in diamond production of 4% to 6.3m carats versus the same quarter of last year, partly due to reduced production last year as negative trading conditions prevailed.
Platinum production was broadly unchanged in the most recent quarter, while iron ore production rose by 3% from Kumba and by 53% from Minas-Rio. In the case of the former, productivity improvements were a key reason for the rise, while at the latter the operation continues to ramp up. Nickel production was up 66% due to completion of the Barro Alto furnace rebuilds. However, copper production fell by 9% due to lower grades as well employee strike activity.
Looking ahead, Anglo American is forecast to increase its bottom line by 47% in the current year, followed by further growth of 12% next year. Clearly, this is partly due to an improving outlook for commodity prices, which means that investors should seek a wide margin of safety in case commodity prices deteriorate over the medium term. With Anglo American trading on a price-to-earnings growth (PEG) ratio of 1, it offers good value for money. That's especially the case since its reorganisation offers scope for improved productivity in the coming years.
Of course, the resources sector includes a number of appealing stocks at the present time. One example is BHP Billiton(LSE: BLT). It offers a significant amount of diversity, with BHP having a petroleum division in addition to its mining operations.
As with Anglo American, BHP is forecast to increase its bottom line at a rapid rate, thanks partly to an improved outlook for commodity prices. For example, BHP's earnings are forecast to rise by 210% in the current year. This puts it on a PEG ratio of just 0.1, which is significantly lower than that of Anglo American.
Furthermore, with BHP yielding 2.8% from a dividend covered 1.7 times by profit, it has greater income appeal than Anglo American too. Anglo American isn't due to pay a dividend this year but with profit growth likely to be high in 2017, it's expected to yield 1.1% from a dividend covered 7.3 times by profit next year.
Clearly, both companies are cheap and are worth buying for the long term. Their share prices may be volatile in the near term, but with BHP having a petroleum division it offers greater diversity than Anglo American. Alongside its superior income prospects and lower valuation, it appears to be the better buy of the two stocks.
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Peter Stephens owns shares of Anglo American and BHP Billiton. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.