Currently viewing Global edition

Screws turn on Anglo American

Anglo American Corp has gone from being a stockmarket favourite to bottom of the class in its peer group, and among the worst-hit among the majors during the pandemic.
Screws turn on Anglo American Screws turn on Anglo American Screws turn on Anglo American Screws turn on Anglo American Screws turn on Anglo American

Richard Wachman in London

Its stock price has underperformed rivals such as Rio Tinto and BHP, morphing into a company "with issues", said one wag, albeit issues that are nowhere near as bad as in the trough of 2015/16.

Twelve months Anglo was firing on all cylinders, after a canny streamlining of its business and a far-reaching efficiency programme spearheaded by CEO Mark Cutifani.

Its pull was an asset base with diversified operations in a number of geographies, offering a hedge to investors throughout the cycle, or so the argument went. Anglo produces precious metals, copper, iron ore, coal, and energy minerals.

But this week, when he unveils interim numbers, Cutifani knows he must allay myriad concerns, aware that Anglo's golden era of 2018/19 has come to a grinding halt.

First up, the pandemic is still dire in South Africa where Anglo makes around half its profits.

Second, in COVID-hit South America, operations have also been knocked by a drought in Chile. Second quarter data showed group production down 18%.

While Rio and BHP are coining it from iron ore with bumper dividends on the horizon, Anglo must take a more prosaic view on capital returns.

There's more. Operational issues have surfaced in Australia. In May, five people were hurt after an explosion in an accident at the Grosvenor metallurgical coal mine in central Queensland. The mine remains closed. One grumpy analyst said: "In November we were told Australian metallurgical coal was fantastic, and the operations very well run. You shouldn't have gas fill up like that which results in an explosion".

There has been disruption elsewhere, a PGM converter failure at an Amplats refinery where one treatment plant went off line because it was broken and the other had leaks, contributing to quite a large working capital build-up this year to $1.3 billion. The interruption was a drag on free cash flow, as Amplats couldn't turn concentrate into finished metal. 

The other big problem, of course has been at De Beers as the diamonds market is still frozen because all the mid-stream polishers in India have shut down amid the virus, and consumers aren't spending. Diamond production fell 54% in the three months to June compared with the same period last year.

Cutifani must also reassure about net debt which has increased from $4.6 billion to an estimated $7.6 billion by the end of the second quarter, says Jefferies.

With peak capital expenditure not due till 2021 as work accelerates on the Quellaveco copper mine in Peru and the Woodsmith polyhalite mine in the UK, Anglo must be careful its net-debt to EBITDA-ratio remains at around 1.5-times or raise eyebrows at credit rating agencies.

In May, Fitch Ratings said the company's rating of BBB with "a stable outlook" reflected Anglo had headroom for debt capacity and financial gearing. Its rating case assumed net leverage would increase towards 1.5-times over the medium term.

In these risk averse times, the Anglo bottle looks more half empty than half full. Rio Tinto and BHP Group, said brokers, operate in mostly OECD countries, whereas Anglo has material exposure to more challenging operating environments, like South Africa and Brazil.

And yet, there's a widespread view Anglo's recovery prospects look good, and we are not looking into the sort of abyss of five years ago when debt levels had soared.

BMO Capital Markets said there was still merit in its investment thesis that Anglo offered the most complete exposure to each part of the recovery.

"We also think the continued roll-out of new technologies (e.g. coarse particle flotation) could improve costs/productivity beyond current assumptions, albeit there will likely be delays due to COVID-19."

BMO has increased its target price to £21/share and the company ranks second only to Rio Tinto in its majors pecking order.

Accepted, analysts agree that at Anglo's current market value (£27 billion), it could be worth more if it was broken up. But there's little appetite for gung-ho M&A at the moment, and only a possible spin-off or sale of Anglo's South African thermal coal assets is being looked at by the board.

As long as a sustainable recovery unfolds (admittedly, this is the $64,000 question), market sentiment could change rapidly and Anglo experience a much better second half, said BMO.

That said, there's more than a ring of truth in Jefferies' comment that after a steady run of operational out-performance since 2016, "Anglo has had an extraordinarily challenging first half and is now under some pressure to turn it around - once again".