Anglo American earnings drop off in ‘unstable’ conditions

The comedown from 2021’s mining profit high has also impacted Anglo American (AAL), which has a more diversified portfolio than Rio Tinto (RIO) and BHP (BHP). Anglo saw its underlying Ebitda fall 30 per cent to $14.5bn (£12bn) with the underlying margin down by nine percentage points to 47 per cent. 

Lower copper, iron ore and platinum group metals prices hit profits, but improvements in diamonds and metallurgical coal sales offset this to some extent. Production was knocked by heavy rain in the iron ore division, and output dropping at two key copper mines. 

Chief executive Duncan Wanblad said the macroeconomic environment was “quite unstable” last year and the company saw “very significant” cost pressures. The company’s copper cash cost jumped 30 per cent alone. 

Anglo brought the new Quellaveco mine into production last year, but the challenges at its other operations largely balanced out its contribution. It added 100,000 tonnes of copper in 2022, but this will climb to over 300,000 tonnes this year if Anglo can keep production going as planned during mass disruption in Peru. 

Bringing Quellaveco into operation is a solid demonstration of Anglo’s development abilities – but the Woodsmith mine in North Yorkshire could be an even greater test. The miner picked it up for a song after Sirius Minerals ran into trouble, but the costs are mounting as development on the fertiliser mine continues. Anglo knocked $1.7bn off its valuation of the project, and now sees production starting in 2027, with the average annual spend around $1bn until then. 

“The $1bn in capex will also pressure Anglo American’s free cash yield,” said RBC Capital Markets analyst Tyler Broda, who forecasts a 4 per cent free cash flow yield for this year. He added that Woodsmith would “add to the potential cash generation pressure into a cyclical downturn”. 

For 2023, the company has forecast that $800mn will be spent on Woodsmith, largely to continue the shaft and transport tunnel work. It has increased its planned production from 10mn tonnes a year to 13mn tonnes. 

Anglo is more exposed than the other major miners to consumer buying habits due to its De Beers diamond division. It already reported that rough diamond sales had slowed in the second half of 2022 despite an overall improvement in earnings, as “retailers restocked more cautiously, causing midstream polished diamond inventories to build up through the second half of the year”. 

Anglo offers more moderate highs, lows and dividend payouts than the other major miners, and its lower valuation than Rio Tinto and BHP reflects this. We like the lower reliance on iron ore and copper for earnings. Buy. 

Last IC View: Buy, 2,850p, 28 Jul 2022