Anglo American (AAL) Ordinary USD0.54945

Underlying cash profit (EBITDA) fell 31% to $10bn. Performance was impacted by lower prices, particularly from diamonds and platinum group metals. There was also an ongoing drag from inflated costs, somewhat offset by higher volumes.

A deal has been reached with Vale to acquire its Serpentina iron ore resource in Brazil plus $157.5m in cash. In return Vale will take a 15% stake in the nearby Minas-Rio iron ore mine.

Anglo wrote down the value of both its Diamond and Nickel operations, by $1.6bn and $0.5bn respectively.

There was a free cash outflow of $1.4bn, which contributed to a $3.7bn increase in net debt to $10.6bn.

The board proposed a final dividend of $0.41, in line with a 40% payout policy.

The shares rose 2.5% in early trading.

Our view

Anglo American’s production cuts last year mean sentiment is low. It was important that updates following full-year results didn’t include any further disappointment, and Anglo delivered on that. Markets have now adjusted their outlooks to the lower base and if we look at Anglo's operations, there's plenty to like but plenty to fix.

The asset mix is diverse, with a tilt toward iron ore and copper. But there’s also nickel, diamonds and platinum metals in the mix. It’s in some of the smaller areas where trouble’s been brewing. The diamond market has been poor, partly shifting dynamics but also an inventory overhang over the second half which should improve. The outlook for nickel pricing has been revised lower too and Anglo has had to write down the value of both operations as a result.

Copper and iron ore are both areas we like and together accounted for 72% of cash profit last year. Of the two, growth capital is focused on copper. Quellaveco in Peru finished its ramp up over 2023 and in Chile there’s plans to increase production from Collahuasi – both are high margin assets.

The iron ore portfolio is set to expand with the Vale deal adding a fresh resource base to the Minas-Rio mine. We like the deal, it gives access to higher grade ore which is not only more attractive to buyers but should also lead to lower costs. But it’s a long way off, so not something likely to have an impact anytime soon.

We're also excited about the potential for the Woodsmith project, which will give a fresh avenue into crop nutrients. It's a massive deep mine project, which means getting the planning and build done well is key. That's why the group took a hefty impairment charge in 2022, as the cost and timeline had to be pushed further out. We wouldn’t be too surprised to see Anglo bring on partner here, to help share some of the costs.

Looking to the balance sheet, net debt has risen but remains at a sustainable level. Payouts from profits above the 40% base level are unlikely and there’s a big cost effort underway to try and improve cash flows.

With expectations rebased and sentiment relatively low, we see scope for a turnaround at Anglo. Aside from commodity prices, which are always a big part of the story, there’s scope to make strategic changes that could shift the dial. In the meantime, there’s uncertainty lingering, and we prefer other names in the sector.

Environmental, social and governance (ESG) risk

Mining companies tend to come with relatively high ESG risk. Emissions, effluences and waste and community relations are key risk drivers in this sector. Carbon emissions, resource use, health and safety and bribery and corruption are also contributors to ESG risk.

According to Sustainalytics, Anglo American’s management of material ESG issues is strong.

Climate targets include carbon neutrality across operations by 2040. There are also targets for a 30% improvement in energy efficiency and a 50% reduction in freshwater withdrawal against 2016 levels in water scarce areas by 2030. There is a strong renewable energy programme, which is expected to fully meet energy needs in Chile, Brazil, Peru and South Africa.

ESG data sourced from Sustainalytics.

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