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Anglo American - Debts fall and profits rise

George Salmon | 21 February 2017 | A A A
Anglo American - Debts fall and profits rise

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Anglo American Ordinary USD0.54945

Sell: 2,587.00 | Buy: 2,588.00 | Change 0.00 (0.00%)
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Full year results show that net debt has fallen to $8.5bn, below the $10bn target. Debt reduction was assisted by $2.6bn of free cash flow and disposals of $1.8bn, primarily from the niobium and phosphates business. The shares were broadly flat following the news.

Our view

At the very depth of the commodities rout, Anglo American was in pretty dire straits. With a mountain of debt on its back and earnings shrinking rapidly, the group unveiled radical plans to transform 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. Consumer driven commodities Diamonds, Platinum and Copper were set to be the group's future.

Disposals started swiftly enough, with Niobium and Phosphate assets promptly sold off. However, with prices bouncing in 2016, the group has deleveraged much quicker than had been expected. Anglo is now saying it has completed as many disposals as it needs to. It may well be posturing to an extent (after all who wants to label themselves as a forced seller?) but it appears it'll retain many assets many had thought it would get rid of. High profile examples include the vast Minas Rio project in South America and South African iron ore mine Kumba.

These projects have can produce iron ore at around $27-30 per tonne, so there is plenty to be said for keeping them on board, especially with the iron ore price around $90 a tonne. However, larger rivals such as Rio Tinto and BHP Billiton boast even lower costs. Anglo's Diamond and Copper assets are very high quality, and should be less cyclical in the long run.

As Anglo American celebrates its 100th birthday, it's clear that its consumer driven commodities are set to play a leading role in the group's future. What we aren't sure about is whether the more cyclical assets like Iron Ore and Coal will be sticking around to share the stage.

Full year results:

Underlying earnings before interest tax, depreciation and amortisation (EBITDA) increased from $4.9bn to $6.1bn. With realised prices largely comparable to 2015, this was primarily driven by strong cost control, plus a $694m boost from favourable currency moves.

Across the main divisions, higher prices and healthier demand led the Iron Ore & Manganese, Coal and De Beers diamond business to strong profit growth. However, falling prices meant earnings from Platinum and Copper fell. Within Copper, adverse weather and strike action impacted production at the Los Bronces mine in Chile.

Looking forwards, Mark Cutifani, Chief Executive of Anglo American acknowledges that the group will need to maintain operating discipline before it can support competitive shareholder returns, but added that the group is targeting a resumption of dividend payments at the end of 2017.

2017 capital expenditure is set to be around $2.5bn, in line with 2016. This includes maintenance expenditure of $1.2bn. The group says that no further disposals will be required for the purposes of deleveraging.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.