Anglo American’s margin call

By Anglo’s calculation, costs have moved from the 52nd to the 46th percentile in five years. The copper, metallurgical coal, diamond, platinum and nickel divisions are now more resilient to price shocks, while only iron ore and thermal coal output is less competitive. That’s a plus, while the fact that group copper equivalent unit costs increased by 5 per cent in the period needn’t frighten investors. After all, competitors face inflationary pressures, too.

But productivity gains are not exponential. Since 2012, Anglo has increased its mining cash profit margin by 11 percentage points. Over the next four years, hitting the lower end of a 5-10 percentage point margin improvement target would still be impressive.

The good news for long-term holders is that Anglo has a plan. Having secured pre-funding from junior partner Mitsubishi, the starter pistol has now been fired on the development of Quellaveco in Peru. Once it produces its first copper in 2022, the mine is expected to pay back its $5bn-$5.3bn (£3.8bn-£4bn) capital cost within four years, with good grades and scale likely to displace around 300,000 tonnes of production in the first quarter of the global cost curve.

With a projected cash profit margin and return on capital employed (ROCE) above 50 per cent and 20 per cent respectively, Quellaveco promises to solve a perennial problem for miners: how to invest without diluting the asset base. ROCE hit a respectable 19 per cent in the first half of 2018, notwithstanding the impact of the suspension of output at Minas-Rio since March, following the discovery of leaks in the iron ore slurry pipeline.

So far, lost production has cost Anglo $300m in cash profits and ongoing remedial works will continue to drag on capital until at least the fourth quarter. Those works have not yet resulted in an impairment to the project’s $4.2bn carrying value, but a revaluation of De Beers’ South African operations did, softening the bottom line in the process.