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Investing in mining small caps could pay dividends

Last updated: 15:44 18 Mar 2016 GMT, First published: 12:44 18 Mar 2016 GMT

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A couple of hot dividend stocks from the minerals sector

In a review of the metals and mining sector, Peel Hunt asks: are we experiencing a “trash rally” or have we really hit the bottom?

The sector has seen a re-rating since gold and iron prices started hardening in January, while other base metals joined the rally in February.

“The iron ore move is potentially a short-term restocking effect following the resumption of trading after the Chinese new year. Gold appears to have a greater level of structural support,” Peel Hunt opines.

In the broker's view, neither purchasing managers index (PMI) data nor import or inventory data yet suggests metals prices are likely to rise further without meaningful supply interruptions, but that does not mean there are no stocks in the sector that are worth backing.

At the small-caps end of the sector Peel Hunt likes copper producer Central Asia Metals Ltd (LON:CAML), which appears to have missed out in the sector rally, and Anglo Pacific Group PLC (LON:APF, TSE:APY), the base metals and bulk materials royalties firm.

Kazakhstan-focused CAML has a strong net cash position and a low cost asset in Kounrad that should underpin stable dividend payments for the foreseeable future.

Trading at 57.69p, the last two dividends have amounted to 12p in aggregate, which means the stock is yielding a barely plausible 7.9%.

Peel Hunt reckons underlying earnings in 2016 will be on a par with 2015, as higher volumes and lower costs pretty much offset lower copper prices.

The broker's model works on the basis of a 25% revenue pay-out assumption, which leads to a projected 6% yield in 2016 rising to 7.4% in 2017.

At Anglo Pacific, rising production at its Kestrel and Narrarbri assets should start driving improved revenues, Peel Hunt forecasts.

“Coal prices look to have stabilised over the last few months, suggesting the higher volumes drive higher revenues, rather than simply helping to offset lower prices,” the broker suggested.

Anglo's policy is to pay a substantial proportion of its royalties to shareholders as dividends, with a long term target dividend of 65% of adjusted earnings.

Peel Hunt notes that a cut in the final dividend last year to 3p from 4p the year before does not look as if it has reassured the market that the reduced dividend is sustainable.

Nevertheless, the median forecast of analysts that follow the stock points to a 7p pay-out this year, which puts the shares on a dividend yield of around 11%.

Peel Hunt goes for a more cautious forecast of a 10p full-year dividend, which still puts the stock on a yield of 10%.

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