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Value relative to other stocks

Renaissance Capital

1 April 2019

Metals & Mining

We believe many mining companies still offer better internal rates of return over a 10-year investment period than companies listed in other sectors, on the key assumption that they do not embark on value-destructive capital allocation.

IRR captures near-term cash generation and the benefit of long-term growth. What we view as diversified miners’ attractive near-term cash-flow yields support more attractive IRR than other sectors, despite limited earnings growth (Figure 21).

To see how the resource companies under our coverage stack up in terms of long-term value relative to other companies in other sectors, we have constructed a simple model to forecast dividends 10 years out:

1.We use Thomson Reuters consensus EPS and DPS forecasts for the next two years up to 2019. We assume the consensus 2019 forecast represents normalised mid-cycle earnings.

2.We forecast EPS beyond 2019 by assuming 14-16% returns on incremental investment. We use the following formula: Thomson Reuters 2018E EPS forecast + (change in book value per share x RoI%).

3.We calculate DPS as EPS x payout ratio (1 - retention rate).

4.We assume a low retention rate (around 20%) for low-growth companies and we assume retention rates drop to around 50% for high-growth companies.

We assume all companies achieve returns on incremental investment of around 15%

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