This FTSE 100 titan still looks great value

Anglo American, mining equipment and rocks
Anglo American, mining equipment and rocks

Rewind to January last year. Back then, a crash in commodities left many of the biggest UK-listed mining companies languishing in share price lows. Since then, they've rebounded with gusto, demonstrating why buying such businesses during periods of market panic can be seriously profitable.

One example of this would be diamond, platinum and copper giant AngloAmerican(LSE: AAL). At one point, the £16bn cap miner's share dropped to just 231p. Had you the bottle to buy the stock, you'd now be sitting on a four-bagger.

That said, I think the shares remain a great buy even now.

Business as usual

Today's Q2 production update suggests that most of Anglo's businesses are performing well.

Solid trading conditions combined with a ramp-up of operations at the company's Gahcho Kue mine in Canada led to a 36% increase in rough diamond production to 8.7 million carats. Platinum production rose by 5%, including a 15% rise at Anglo's Mogalakwena mine thanks in part to higher grades being achieved. Iron ore volumes also rose (by 28%) and full-year guidance was hiked as a result of operational improvements at the company's Sishen mine.

It wasn't all good news. Coal production in Australia was impacted by Cyclone Debbie and ongoing geological issues at the Grosvenor mine, although things are expected to improve in the second half of the financial year. Copper production also fell slightly, even if the temporary stoppage of activities at Anglo's El Soldado mine was partially offset by increased production elsewhere. While sales of the metal were also hit by port closures in Chile, due to difficult weather conditions, full year production guidance remained unchanged.

Still cheap

From a valuation perspective, Anglo still looks cheap relative to its larger industry peers. Despite a stellar performance over the last 18 months, the fact that its shares still change hands at just 7 times forecast earnings makes those of fellow FTSE 100 constituents BHPBilliton (13) and RioTinto (10) look rather expensive.

While commodity prices are beyond the company's control, the sale of non-core assets (a group of coal mines in South Africa were recently offloaded for £134m) and reduction in capital expenditure have helped improve levels of free cash flow and allowed the company to begin reducing its sizeable debt burden. In contrast to the beginning of last year, Anglo's finances are now looking a lot healthier.

Of course, part of the appeal of huge mining companies - aside from their diversified operations - is their willingness to pay huge dividends. On this front, Anglo doesn't disappoint. Right now, owning its shares will give you access to a forecast 4% yield, fully covered by profits. Assuming predicted dividend growth of 11% isn't completely off the mark, this would grow to a very satisfying 4.4% in the next financial year. At a time when interest rates on cash are still laughably low, that's very attractive. Although admittedly less than Rio Tinto's mooted 5.7% and BHP Billiton's 5% yields for 2017, it should be mentioned that both of these are expected fall in 2018. Anglo's smaller size relative to these companies arguably means it also has more room to grow over the coming years.

Investing in cyclical mining stocks isn't for everyone. Nevertheless, with the commodity storm having passed, I reckon Anglo would be a decent addition to any diversified portfolio.

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Over the long term, shares appearing to offer value (like those of Anglo American) have been shown to massively outperform hot growth stocks. As such, those with long investing horizons may wish to spend more time scrutinising these businesses than the latest overhyped tech stocks.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Rio Tinto. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes