Since the end of 2015, shares in KAZ Minerals (LSE: KAZ) and Antofagasta (LSE: ANTO) have charged higher as sentiment towards the mining sector has improved. Indeed, over the pasttwo years, shares in these two miners have risen by 660% and 87% respectively excluding dividends.
But after this impressive run, I believe it could now be time for investors to turn their backs on these companies and take profits.
Fizzling out
Kazs run since the end of 2014 has made the company one of the best-performing stocks in the mining sector, and its easy to see why. The companys fundamentals have improved dramatically over the period and the firms first-half results for the six months ended 30 June confirm that this trend is continuing.
Today the company reported that during the half, gross revenues increased 2.3 times to $873m while earnings before interest tax depreciation and amortisation increased 273% to $429m. Operating profit hit $291m, up 330% year-on-year. Rising profitability allowed the company to pay down $227m of debt during the period taking net debt to $2.4bn or around 2.8 times EBITDA. Management is expecting debt to fall further in the months ahead.
For the full year, City analysts are expecting the company to report a pre-tax profit of 305m, which works out at 55.6p per share giving a valuation of 11.6 times forward earnings at current prices. This valuation isnt particularly demanding, and analysts have pencilled in further earnings per share growth of 34% for 2018.
However, while shares in Kaz might look attractive based on current City estimates, the companys earnings are still subject to the whims of the copper market, and theres no guarantee copper prices will remain supportive for the next two years.
So, even though Kazs fundamentals are improving, and shares in the company might rise further from current levels, booking profits after a gain of more than 600% seems prudent.
Not worth the money
Kaz looks cheap compared to the companys current and projected growth. Shares in Antofagasta on the other hand, look anythingbut.
Antofagasta is one of the most expensive miners trading on the London market. At a forward P/E of 23.8, the shares support a valuation that is more suited to a high growth tech company, than a Chilean copper producer. Granted, analysts are expecting the companys earnings per share to grow by 45% 2017, but even after accounting for this growth, its difficult to justify the groups high valuation.
Just like Kaz, Antofagastas profits are dependent on copper prices, so income is volatile. If copper prices suddenly lurch lower, Antofagastas high valuation will come back to haunt the company as its likely the shares will suffer more than the rest of the sector as the companys earnings growth evaporates.
Still, the one thing to like about Antofagasta is the companys dividend payout. At the time of writing, analysts are projecting a dividend payout of 14p per share for 2017, giving a yield of 1.6%. Based on current earnings projections, this payout is covered 2.7 times by earnings per share, leaving plenty of room for payout growth or special dividends. Unfortunately, this dividend potential isnt enough to convince me that investors should hold on to the company.
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