Anglo American’s mix’n’match success

Trillions of dollars in government stimulus around the world should keep those construction materials like iron ore and copper (the so-called red metal) at high prices for some time, even after a strong 2020. Iron ore has been over $150 per tonne (t) for almost two months, the first time this has happened in a decade, while copper is over $8,000/t for the first time since 2013. 

Mining analysts have long been bullish on copper, given the fall in mine reserves and the anticipated ramp up in demand from electrification. The copper market itself has been slower to catch on. 

Sharp price moves, like those experienced by the red metal in recent months, are often the result of traders speculating and therefore peter out when interest moves to the next hot commodity. But while copper is ripe for this kind of activity given the current supply tightness, broker Liberum argued this month “better-than-expected fundamentals” had actually driven the latest price surge. 

Previously, the copper price had closely tracked the US dollar. 

Anglo American (AAL), the blue-chip diversified mining company, offers exposure to the current metal price highs and themes like electrification that will drive commodity prices for the next decade. Its portfolio also has enough variety to limit the risks to earnings should metal prices dropping from recent highs. Management's focus on cutting costs and debt before joining other London-listed mining majors in the dividend rush means finances look resilient should there be another downturn. The focus on the balance sheet and investment also means it has set it up to benefit from stronger metal prices.

Its two major weak points currently are diamonds – through the storied De Beers division – and thermal coal. Coal is a major contributor to Anglo's so-called "scope 3" carbon emissions; a measure of the environmental impact of a company's products that goes beyond the factory gates. This is an increasingly important consideration for institutional investors. The company has said it would spin out its thermal coal assets in South Africa.

Another risk is a class action suit alleging Anglo is responsible for dangerous levels of lead in a community near the Kabwe lead mine in Zambia, which it held a stake in until the 1970s. Those who have filed the suit in South Africa say Anglo was the operator of the mine for 50 years, while the company has said it was a minority owner.

Difference through diversification

London does not offer a wide range of red-metal options. There are the majors, which all own stakes in massive mines but also, in common with Anlgo, contain trade-offs, such as coal and difficult projects. Other majors include the copper-focused £1bn-plus players Antofagasta (ANTO) and Kaz Minerals (KAZ), and for the smaller miners there are Atalaya Mining (ATYM) and Central Asia Metals (CAML). 

Anglo is smaller than the other majors, and will get a fifth of its revenue from copper in 2020, according to RBC Capital Markets forecasts, compared with BHP (BHP) and Glencore (GLEN) at a quarter and two-fifths, respectively. BHP and Rio make most of their profits from iron ore, with copper coming in second in earnings terms. Iron ore is a major part of Anglo’s portfolio as well, providing half of underlying cash profits in the first half of 2020, but this will likely drop back to a third over the coming years. 

Anglo’s varied portfolio has its upsides. When copper was weak in recent years the miner’s platinum group metal (PGM) exposure supported earnings, while iron ore will lead cash profits in 2020. RBC’s net asset value (NAV) estimate puts platinum group metals (PGMs) as the most valuable part of the company, at 35 per cent total NAV, or 1,057p a share. The events of 2020 mean Anglo will be more reliant on copper and iron ore for earnings. 

When the results for 2020 come out in the last week of February, PGM will be far weaker than 2019 despite the high prices because of an explosion at a smelter in South Africa in March, which led to a drop in guidance for PGMs from 3m-3.3m ounces (oz) to 2.6m-2.7m oz. 

Diamonds are at a weak point, but RBC still forecasts a cash profit of $286m for De Beers, compared with PGMs at almost $1.5bn and iron ore at $4.4bn. For coal the broker pencils in a cash loss of $53m.

It’s electrifying 

Long-term confidence in copper comes from its broad role in the energy transition, given its use in infrastructure, electric vehicles and renewables. General industrial demand from population growth also drives the market. Within that trend, Anglo also offers a rare combination of both EV exposure through nickel, and internal combustion engine (ICE) car sales through PGMs. 

Nickel is a key ingredient in electric vehicle batteries. Tesla (TSLA), for example, uses a nickel-heavy battery to avoid cobalt. Palladium and rhodium, which are PGMs, also provide exposure to the non-EV car market, which needs the metals for exhaust systems. One risk to palladium prices is cheaper platinum coming in as a replacement, although this takes time, and Anglo mines platinum as well. 

Copper has a compelling narrative over the coming years. But given the volatility of the market, it won’t just park itself at $8,000/t. Macquarie Bank forecasts a sharp drop in 2022, back to $6,000/t, and then a fall to $5,575/t for 2023. This is just when Anglo hopes to have new 60 per cent-owned mine Quellaveco coming into production, so it could prove a difficult first few years at the project. Nevertheless, low cash costs of around $2,300/t should mean it will still generate cash flow in such a price environment. RBC is more optimistic, with a forecast of around $6,600/t in 2022 and 2023. 

Chief executive Mark Cutifani has said he will stay at the company until the mine is finished. He is now the last of the old guard at the majors, after the departures of Andrew Mackenzie and Jean-Sebastien Jacques from Rio and BHP, respectively, and the retirement announcement of Glencore's Ivan Glasenberg. If he leaves just as first copper is poured, Anglo will be at the end of a major capital spending campaign, given the $5.3bn-$5.4bn put into Quellaveco by Anglo and its co-owner Mitsubishi as well as spending on improving operations all round, which was a focus of Mr Cutifani during the downturn. 

Investors now look set to start benefiting from these investments. And big spending will not stop after the Quellaveco copper mine is built.

Last year, Anglo bought the Woodsmith fertiliser project for what Sirius Minerals shareholders would have argued was a bargain basement price of around £400m. But the project, which involves tunnelling under 23 miles of Yorkshire, has not become easier to complete now it is out of Sirius’s hands. Anglo has planned $500m in capital spending on Woodsmith in 2021. Mr Cutifani said last month the company would share more about the project in February. 

He also made it clear Anglo had not just thrown hundreds of millions of dollars at a project it was unsure of. “...I don’t want people to be confused in terms of are we going ahead or not? We are going ahead,” he said. 

Last time we advanced Anglo's investment case it was largely on the back of its palladium mining business being undervalued. It took the iron ore price going well beyond $100/t and the general equities uptick to really see an improvement, but we think there is further room to run.

Anglo might not be as aggressive a play on the buoyant backdrop for commodity prices as Rio and BHP, which have seen massive earnings improvement because of greater iron ore exposure, but we think Anglo offers plenty in its own right, largely because of its diversified portfolio and sensible growth prospects in the coming years. 

Buy at 2,664p.