Anglo American reiterates faith in 'future-enabling metals'

It would be cynical to suggest that you can tell when a mining group’s financial performance has come up short when it places particular emphasis on an improved safety record. Anglo American (AAL) saw “overall injury rates decreasing markedly in the first half”. That’s undoubtedly a highly creditable achievement. Unfortunately, cash profits followed suit, falling by 41 per cent to $5.1bn (£4.06bn). Operating cash flows also decreased from $7bn to $3.9bn year-on-year. And an accompanying fall-away in underlying earnings precipitated a 56 per cent cut in the interim dividend. The group’s return-on-capital-employed halved to 18 per cent from the HY 2022 rate.

Group chief executive, Duncan Wanblad, said that first half performance had suffered due to “macro headwinds – principally, weaker prices for our products and input cost inflation”. That translates to a 19 per cent average price fall across a range of commodities, “partially offset by a 10 per cent volume increase compared with the first half of 2022”.

Wanblad said that a broad recovery in commodity prices through the remainder of 2023 is unlikely. Part of the problem is linked to the weaker-then-expected rebound in Chinese demand following the country’s abandonment of its harsh Covid-19 restrictions. The underwhelming recovery of the world’s biggest steelmaker and the consequent impact on underlying commodity pricing is doubly disappointing given that Anglo has driven its output of metallurgical coal by 42 per cent in the period under review.  

Management can’t do anything to influence underlying commodity prices, but shareholders will find encouragement in the group’s operational progress. In keeping with some industry peers, Anglo has been expanding its copper segment, a positive move given the ongoing energy transition. Total copper production increased by 42 per cent to 387,200 tonnes, primarily driven by volumes from its Peruvian Quellaveco operation, which reached commercial production levels in June. The ramp-up fed through to a 28 per cent in underlying cash profits to $1.49bn.

Output of another important transitional metal – nickel – was in line with the prior period, albeit at lower grades, while production of platinum group metals decreased by 7 per cent, again due to lower grades, in addition to planned infrastructure closures.

Wanblad’s view on the broader commodities market is backed by trading patterns on futures contracts and continued macroeconomic uncertainties, although Anglo points out that long-term prospects for “future-enabling metals and minerals is ever more compelling”. We concur on that score, but investors can expect a degree of volatility in the near-term, or at least until China’s Manufacturing PMI index shows a sustained recovery. The shares trade at 10 times consensus earnings with a forward dividend yield of 4 per cent. Buy.

Last IC view: Buy, 3,045p, 23 Feb 2023