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Anglo American: the tortoise in metals bull market

Anglo American had a solid 2020 and is expected to do even better this year thanks to its copper, iron ore and PGM divisions
Anglo American: the tortoise in metals bull market
  • Anglo American announces 72ȼ final dividend, a quarter higher than consensus forecasts
  • Strong figures underpinned by soaring iron ore, copper and PGM prices
  • Kaz Minerals cash profits slightly ahead of 2019, although takeover effort overshadows earnings

Anglo American (AAL) had more than its fair share of difficulties last year. Beyond the pandemic, its profit-driving platinum group metals (PGM) production was hit by a plant outage, its coal operations struggled and the weak diamond market meant De Beers was once again well off its past profit contributions.

But thanks to stronger iron ore, copper and PGM prices, Anglo shareholders will get a pumped up final dividend of 72ȼ (51p). The final payout for investors was a quarter ahead of consensus estimates but the lower half-year dividend sees the total of 100c fall behind last year’s 109c. 

The diversified miner has a broader range of products than Rio Tinto (RIO) and BHP (BHP), meaning it did not have the supercharged profits those two majors saw. Underlying cash profits were down 2 per cent on 2019 to $9.8bn, from a 10 per cent drop in mining volumes brought on by Covid-19 restrictions. Anglo’s South American and South African operations faced shutdowns and its share of production from the Cerrejon coal operation in Colombia was hit by strikes. 

Spot prices for iron ore and copper indicate a stronger performance this year, with the red metal hitting a nine-year high of almost $9,300 a tonne (t) in the last week of February. The higher prices have already flowed through to the bottom line, however. Iron ore has been above $80/t for the past two years although has been over $150/t since early December. 

Anglo’s unit costs for the steel ingredient are $21/t at Minas Rio and $33/t at Kumba Iron Ore, a separately-listed South African subsidiary. Iron ore as a whole saw underlying cash profits climbed more than $2bn to $3.4bn in 2020. The De Beers diamonds division and coal operations saw adjusted cash profit declines compared to 2019, with coal’s adjusted Ebitda contribution falling from $1.8bn to $35m. 

Chief executive Mark Cutifani said the miner would be looking at growth from 2021 onwards, promising 20-25 per cent volume growth in 3-5 years. The major driver of that growth is the new Quellaveco copper mine in Peru. Anglo said last year there would be a slowdown in development because of Covid-19 but said on results day that it was on track to meet the original timeline. 

The new 60-per-cent-owned copper mine was a significant draw on capital spending in 2020, at $788m. This will ramp up to $800m-$1bn this year. The Woodsmith mine, brought in through the controversial acquisition of Sirius Minerals, will draw about $500m in spending in 2021, which Anglo said was $200m more than expected when it bought out the struggling developer last year, because of the “good progress made”. 

RBC Capital Markets analyst Tyler Broda said Anglo would likely have a stellar 2021. 

“PGMs, copper and iron ore should continue to underpin even healthier results in 2021 and diamonds and coal should also continue to recover,” he said. “Growth remains on track and although there is a likely bump in Woodsmith capex, the group’s financial position remains very robust.” 

Net debt climbed in 2020 because of working capital movements and a drop in operating cash flows. 

Copping it sweet 

Anglo is not the only company patting itself on the back for an on-track copper project and looking ready for a big year of cash flow thanks to the surge in prices. 

Kaz Minerals (KAZ) is set to finish its expansion of the Aktogay mine in Kazakhstan this year despite a drop in worker numbers due to the pandemic. Kaz’s copper and gold production figures for 2020 were slightly down on 2019, but higher prices meant cash profits were 6 per cent above 2019 at $1.4bn. This was also 12 per cent above the consensus analyst forecast.

 

But the company’s shareholders won’t get a dividend because of the Nova Resources buyout attempt. Nova is a joint operation between Kaz chairman Oleg Novachuk and major shareholder Vladimir Kim, who collectively own just under 40 per cent of the miner. Under the “recommended” offer backed by a board committee, Nova has the right to drop its offer price by however much would be paid out as dividends. This was also in the first “recommended” offer, made public five months ago. 

At the start of February, Nova offered shareholders 780p per share. Investors reacted by pushing Kaz’s share well beyond this second, higher offer, to over 840p. This is not a final offer but people close to the deal have made the case Nova will struggle to borrow more than the existing $3.5bn in debt needed to complete the deal under the current terms. The strong pound has already added to the cost, given Nova has agreed on a US-dollar loan. 

 Novachuk and Kim need 75 per cent approval, including their holding, to take Kaz off the London Stock Exchange. 

This context gave chief executive Andrew Southam’s analyst presentation on Thursday a bizarre air, where he was talking up progress on the Baimskaya greenfield project while Novachuk and Kim use its “higher risk, capital intensive” nature to convince shareholders to accept the 780p. The Russian project will need major infrastructure built to service it, including a road Kaz will have to fund 200km of, and towards the end of 2020 the company added another $1bn to the expected bill, taking it to $8bn. 

We think 840p is not a bad price to exit at, but shy away from switching it a full sell call given the possibility of the Nova takeover failing. Hold. 

Last IC view: Buy, 1,884p, 30 Jul 2020

ANGLO AMERICAN (AAL)   
ORD PRICE:2,949pMARKET VALUE:£ 36.4bn
TOUCH:2,949-2,953p12-MONTH HIGH:2,982pLOW: 1,018p
DIVIDEND YIELD:4.8%PE RATIO:25
NET ASSET VALUE:2,093pNET DEBT17%
Year to 31 DecTurnover ($bn)Pre-tax profit ($bn)Earnings per share (ȼ)Dividend per share (ȼ)
201621.42.62124nil
201726.25.51248102
201827.66.19280100
201929.96.15281109
202030.95.46169100
% change+3-11-40-9
Ex-div:18 Mar   
Payment:07 May   
£1=$1.42

Last IC view: Buy, 641p,19 Nov 2020

KAZ MINERALS (KAZ)   
ORD PRICE:841pMARKET VALUE:£ 4.0bn
TOUCH:841-848.2p12-MONTH HIGH:870pLOW: 256p
DIVIDEND YIELD:0.7%PE RATIO:9
NET ASSET VALUE:501ȼNET DEBT$2.6bn
Year to 31 DecTurnover ($bn)Pre-tax profit ($m)Earnings per share (ȼ)Dividend per share (ȼ)
20160.7722040nil
20171.66580100nil
20182.1664211412
20192.2772612112
20202.368041354
% change+4+11+12-66
Ex-div:NA   
Payment:NA   
£1=$1.42