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Anglo American - Debts starting to fall

George Salmon | 28 July 2016 | A A A
Anglo American - Debts starting to fall

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Anglo American Ordinary USD0.54945

Sell: 2,619.00 | Buy: 2,621.00 | Change -40.50 (-1.52%)
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Anglo American shares are trading up 4% this morning after the Group released interim results that focussed heavily on efforts to cut costs and bring the balance sheet under control.

Net debt at 30 June was $11.7bn (FY15: $12.9bn) representing gearing of 35.4%. The group expects to deliver total net debt of less than $10bn by the end of 2016, with attributable free cash flow of $1.1bn (H115: $0.2bn) and disposals worth $1.5bn agreed and expected to complete during the second half (including the group's Niobium and Phosphate assets).

Unit costs decreased 19% verses H115. The group expecting to deliver $1.6bn of cost and volume improvement by the end of 2016, of which $0.3bn was delivered in H116.

The group saw underlying earnings before interest and tax (EBIT) fall 27% to $1,382m, mainly due to lower commodity prices ($1.2bn EBIT headwind) - partially offset by weaker producer currencies ($0.9bn EBIT benefit) and cost reductions. Underlying earnings per share fell 23% to 54 cents while attributable return on capital employed held flat at 8%.

Divisional performance

Platinum - Underlying EBIT down 50% to $134m

De Beers - Underlying EBIT up 2% to $585m

Copper - Underlying EBIT down 35% to $113m

Niobium and Phosphates - Underlying EBIT down 18% to $60m

Iron Ore and Manganese - Underlying EBIT down 24% to $390m

Coal - Underlying EBIT down 40% to $160m

Our View

Anglo American is in the midst of transforming itself from a fully diversified bruiser, into a business whose clients are more likely to be found in the luxury shopping districts of London, Hong Kong and New York than the steel works of industrial China.

The new focus on more consumer driven commodities leaves a lot of the business on the block. Uncompetitive mines have been closed or moth-balled, while assets outside of the core, including Nickel, Coal, Iron Ore and Niobium, are all up for sale. Even within Platinum, Diamonds and Copper, the group is pruning to focus on the highest quality assets.

Anglo has a wasted no time in tracking down buyers for its more attractive disposals, Niobium and Phosphates in particular. The largest disposal, the iron ore division, may take some more time. While the South African Kumba mine could be spun off, the massive Minas Rio project in South America requires years of development work before full value can be realised.

However, the huge debt pile means that sweeping disposals will not be enough to return the company to a reasonable state of health; so alongside disposals the group is targeting some truly brutal capex and operating cost cuts.

In the long run we like Anglo's strategy of focusing on consumer driven commodities. The De Beers business has long been the Jewel in the crown and although Platinum prices have been rocky in the past, Anglo's scale and the relative scarcity of Platinum Group Metals mean it should be able to weather a storm. The group is still a long way from financial health but if the targeted cost cuts can be delivered, and the disposals made, then Anglo could begin the long, slow climb out of the hole in which it has found itself.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.