Anglo American output tarnished by copper

In certain respects Anglo American's third-quarter production figures mirror those of industry rivals, with positive news of recovery in key areas tempered by an accompanying fall in copper output.

Both the company's Kumba iron ore unit, and its metallurgical coal operations had to undergo remedial measures during the year due to weather-related setbacks. Normal output has been restored to the Sishen iron ore mine, which together with 0.3m tonnes of new production from recently commissioned Kolomela, fed through into a 3.3 per cent rise in iron ore output to 12.2m tonnes. The company anticipates production at Kolomela will ramp up to 4-5m tonnes through next year.

Following flood-damage repair, Anglo achieved record output of metallurgical coal from its open-cut operations in Queensland, although overall quarterly output declined by four per cent as equipment was relocated to exploit a new seam section at its underground operations. Anglo announced a rise in platinum costs, while indifferent ore grades and another meteorological interruption at Collahuasi reduced copper output by nine per cent to 139,900 tonnes.

Overall, Anglo's third-quarter production figures, though unspectacular, were broadly positive. However, the mining group's plans to expand copper output could be dealt a blow if Codelco, Chile's state-owned copper giant, exercises an option to buy 49 per cent of Anglo Sur, a portfolio of copper assets that includes Anglo's expanding Los Bronces mine.

UBS Investment Research says…

Buy. Anglo American expects copper production to be "marginally higher" year-on-year (implying fourth-quarter production of 194,000 tonnes). Kolomela iron ore mine started in August, six months ahead of schedule and production is forecast at 4-5m tonnes in 2012. Barro Alto [nickel mine] had some start-up issues, but is still expected to reach 40m tonnes by the end of 2012. Unit costs for platinum group metals have been revised up 3 per cent on higher consumable costs. Expect 2011 EPS of 564 cents (355p), up from 413 cents in 2010.

Deutsche Securities says…

Buy. Anglo has reported third-quarter production with iron ore, metallurgical coal, thermal coal and diamonds above our expectations. We had previously assumed that Anglo would receive around $7bn (£4.45bn) based on the Codelco option being exercised, but now think that the likely option price is $5bn, net of $850m of capital gains tax. Factoring this in and using a discounted cashflow model we arrive at a target price around 50 per cent above the current share price.