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Diamonds trump bulk metals for Anglo

A slump in iron-ore prices and a prolonged strike at its platinum mines depressed first-half profitability at Anglo American, but there was sterling news from De Beers.
July 28, 2014

Against a backdrop of industrial strife and lower prices for bulk commodities, Anglo American (AAL) turned in a creditable first-half performance. Underlying earnings rose 2 per cent year on year, while reported operating profits were up a third to $2.97bn (£1.75bn). This result was broadly in line with consensus estimates, but Anglo's current rate of progress does cast doubt over whether it can drive up its current return on capital of 10 per cent to the targeted rate of 15 per cent by 2016.

IC TIP: Buy at 1623p

The five-month strike at the group's platinum mines reduced production by 40 per cent, trimming $385m off the bottom line. But it was lower commodity prices that really kept underlying earnings in check: the aggregate impact amounted to about $1bn. Prices for Anglo's Australian coking coal were down by nearly a quarter, while those received for the group's Kumba iron ore output were 17 per cent adrift of the 2013 equivalent. As a result, the underlying contribution from the iron ore division - the group's key earnings generator - was down by a quarter from a year ago.

There's no doubt Anglo was lumbered with an unfavourable trading environment during the half year. Yet its troubles were offset to a degree by currency gains, particularly the South African rand's fall against the dollar. And the move spearheaded by ousted chief executive Cynthia Carroll to bump up Anglo's stake in the De Beers diamond business to 85 per cent is beginning to look like a master-stroke. The business outshone Anglo's mining complex, with operating profits up over a third to $765m.

Shareholders can also draw comfort from the knowledge that the troubled Minas Rio iron ore project in Brazil remains within its revised budget. With 95 per cent of the work done, it is now on track to deliver its first ore by the end of the year.

JPMorgan Cazenove expects underlying EPS of 161¢ this year, rising to 215¢ in 2015.

ANGLO AMERICAN (AAL)
ORD PRICE:1,623pMARKET VALUE:£22.7bn
TOUCH:1,623-1,624p12-MONTH HIGH:1,678pLow: 1,221p
DIVIDEND YIELD:3.1%PE RATIO:345
NET ASSET VALUE:2,752¢NET DEBT:30%

Half-year to 30 JunTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
201314.42.03132
201414.22.911432
% change-1+48+268-

Ex-div: 6 Aug

Payment: 18 Sep

£1=$1.70