Why Independence Group NL crashed to a 20-month low

Independence Group NL (ASX:IGO) tumbled after it posted a softer-than-expected result even though it remains one of the precious few in the sector that has delivered earnings growth. Is this a buying opportunity?

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Record revenue and cash flow were not enough to save diversified miner Independence Group NL (ASX: IGO) from a savage sell-off this morning as the result was softer than what most analysts were expecting.

The stock tumbled 5.8% to a 20-month low of $3.09 as the mining sector shed 3.5% to become the second worst performing group on our market due to deepening worries about the impact of a slowing Chinese economy on commodity demand.

You would have thought that a 58.1% surge in net profit to $76.8 million on the back of a 24.1% uplift in revenue from ordinary activities to $495.3 million would be enough to give Independence Group some shelter from the storm.

Unfortunately, net profit is around 8% below consensus while its topline was about $10 million short of the average broker estimate.

That wouldn't be so bad in light of the earnings carnage suffered by Fortescue Metals Group Limited (ASX: FMG), or the disappointing profit results from South32 Ltd (ASX: S32), but sentiment towards Independence Group has already been weakened by its weaker-than-expected June quarterly it posted last month.

However, there aren't many miners that can boast higher profits for the year and that makes Independence Group unique in my book. It's also encouraging to see all of its operations meeting or beating production and cash guidance, even though these benchmarks were lowered following its quarterly update.

All eyes are now on the group completing the acquisition of nickel miner Sirius Resources N.L. (ASX: SIR), with Independence Group offering to swap 0.66 of its shares for each Sirius Resources stock plus a cash payment of 52 cents a share.

Some of the other highlights from Independence Group's results include a 57% increase in operating cash flow to $202 million, which underpins its 175% increase in full year dividend payments to 11 cents a share.

This means the stock is yielding around 5% once franking credits are included and there's plenty more franking credits on its balance sheet. In fact, there's $42 million available for distribution with future dividends.

The miner's strong cash position has also allowed it to pay down debt with borrowings falling to $500,000 in 2014-15 compared to $28.3 million in the year before.

While the global turmoil is a drag on industrial metal prices, Independence Group's premier Tropicana gold project offers some protection as the price of the precious metal has been supported by waning risk appetite.

Further, falls in the Australian dollar will bolster the miner's earnings as its cost base is mainly denominated in the local currency, while commodities are sold on a US dollar basis. Experts believe the Aussie has further to fall.

I believe Independence Group offers good value for those willing to stomach the sharp bouts of volatility due to the quality of its assets and management's generally good track record. It was Warren Buffett who said "price is what you pay, value is what you get".

I believe this is true for Independence Group and that's why I am willing to overlook the widely fluctuating share price.

Motley Fool contributor Brendon Lau owns shares of Independence Group NL and South32 Ltd. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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