Mine Anglo's buried value

Platinum itself is in the dumps, but palladium – another PGM – is at an all-time high of $1,700 (£1,351) an ounce (oz), spurred on by demand for hybrid cars. The price was below $1,000 an oz as recently as a year ago. While the PGM division is not Anglo American’s most important, palladium and rhodium price growth did push its contribution to the group’s first-half adjusted cash profit from 11 per cent to 15 per cent of the total – even as cash profits from iron ore quadrupled and dominated the half’s earnings. This price strength has led to a quirk in Anglo American’s (AAL) valuation, which we think provides investors with an opportunity. Its PGM interest consists of an 80 per cent stake in Johannesburg-listed subsidiary Anglo American Platinum (Amplats). Amplats has seen its share price more than double in the past year, making Anglo’s stake, based on enterprise value, worth almost $15bn. Meanwhile, the group’s 70 per cent holding in another Johannesburg-listed business, Kumba Iron Ore, is currently worth $4.5bn. 

In dollar terms, Anglo’s own £24.2bn market cap adjusted for its net debt gives it an enterprise value of $30.8bn, and 63 per cent of this can be accounted for by the value of its holdings in Amplats and Kumba. Taking the group’s cash profits that are not associated with the two Johannesburg-listed companies, the rest of Anglo’s operations are being valued at 2.8 times cash profits. That’s a major discount to the five times cash profits that analysts at RBC reckon is warranted by a peer group comparison. If the broker is right, that suggests Anglo’s share price will need to rise by 28 per cent to address the discrepancy.

True, Anglo’s second-half earnings won’t be as spectacular as the first half because the iron ore price has come back to earth (down to around $90 a tonne from an average of $108 a tonne) and copper remains flat, but investors have plenty to look forward to. The company has caught up with the other major diversified miners in terms of shareholder returns, announcing a $1bn buyback programme this year. RBC said it has shot to the top when measured on a buyback-to-market-cap ratio, with 3.4 per cent to be bought in the next six months. This will be a “one-off” according to chief finance officer Stephen Pearce, but he said in the half-year earnings call that the dividend payout of 40 per cent of underlying earnings would remain for the foreseeable future. 

The divisions driving these returns right now are iron ore, PGMs and coal, with copper down year on year due to the price weakness. Diamond business De Beers is also in a weak spot, with adjusted cash profits for the first half down 27 per cent to $518m. Looking further out, the company is building its copper production through the Quellaveco project in Peru. Anglo has forecast production from the $5bn capital project to come in 2022. This has the added bonus of keeping respected chief executive Mark Cutifani in the job until it is complete, which he has indicated is his intention.