Why I'd dump Tullow Oil plc for Kaz Minerals plc
Kazakhstan-focused copper miner Kaz Minerals (LSE: KAZ) delivered its production report this morning for the nine months and third quarter ending 30 September, and the market likes it.
As I write, the share price is up around 2% at 850p but did go higher than 880p in early trading. Volatility is one thing that we've become used to with Kaz shares, but since the summer of 2016, the trend is up for operations, earnings and the share price.
High growth operations
The FTSE250 company reckons its new open pit copper operations at Bozshakol and Aktogay in Kazakhstan are delivering "one of the highest growth rates in the industry and transforming Kaz Minerals into a company dominated by world-class, open pit copper mines." On top of that, there are three underground mines and associated concentrators in Kazakhstan and the Bozymchak copper-gold mine in Kyrgyzstan.
Today's operational highlights include a 96% increase in copper production over the past nine months compared to the equivalent period the year before. Even over the past three months, production came in more than 14% higher than the previous quarter. Kaz is ramping up copper production just as the price of copper is rising, and that happy combination is working wonders for the firm's cash inflow. Indeed, net debt on 30 September was 9% lower than three months previously, which is a trend that looks set to continue.
Copper market improving
Chief Executive Oleg Novachuk said in the report, "Kaz Minerals is rapidly improving its gearing metrics as we deliver against our operational targets in an improving market for copper." The copper price is a well-known indicator of the strength of world economies and right now I reckon it's telling us that things may not be as grim as many investors fear. That's why I'd be happy holding shares in the firm and would choose them over an oil company such as Tullow Oil(LSE: TLW), which has most of its operations in Africa.
The FTSE 250 business has proven to be too vulnerable to the effects of volatile oil prices for my liking. We've seen the share price plunge from highs close to 1,600p in 2012 to around 185p today as the declining price of oil decimated incoming cash flow. One of the main problems with Tullow is that it has loads of debt - great in the years when the oil price was rising, but disastrous when it fell.
New executive team
In April, Tullow returned to the market with a rights issue to raise around £600m and declared in July, with its half-year results report, that it had used free cash flow and the proceeds of the rights issue to reduce net debt by around $1bn, to $3.8bn, which is still a lot of borrowings. The company also appointed a new executive team to focus on financial discipline and a return to growth.
Tullow has been a troubled business and I think it needs a resurgent oil price to get back into the purple patch it enjoyed previously. However, many doubt that oil will ever return to its previous highs, including me.
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I'm not kidding myself that investing in either of these two firms is anything other than a punt on the direction of the underlying commodity prices. However, a long-term and focused approach is key to building enduring wealth.
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Kevin owns shares in Kaz Minerals. The Motley Fool UK has no position in any of the shares mentioned. 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 us better investors.