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Anglo American - Divi's back, debt's gone

Nicholas Hyett | 27 July 2017 | A A A
Anglo American - Divi's back, debt's gone

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Anglo American Ordinary USD0.54945

Sell: 2,619.00 | Buy: 2,621.00 | Change -40.50 (-1.52%)
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First half underlying earnings of $1.5bn represent a 120% increase compared to the same period last year. This dramatic improvement has seen Anglo slash the debt pile and sparked the return of the dividend, with a first interim payment of $0.48 per share.

The shares rose 4% following the announcement.

Our View

And the transformation is complete - sort of.

18 months ago Anglo looked like it was facing an existential crisis, debts were throttling the business and free cash was non-existent. Now debts are half what they were, and the group has more cash than it knows what to do with. Quite the turnaround.

Unfortunately it's not the turnaround that investors were promised. Back in the very depths of the commodities rout, 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 it had expected. Anglo has since said it has completed as many disposals as it needs to. That could be posturing (after all who wants to label themselves as a forced seller?) but the group does look set to retain 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 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 $70 a tonne. However, Iron Ore and Metallurgical Coal have been the driving forces behind the recovery, and that certainly wasn't the plan. Anglo's high quality, less cyclical, Diamond and Copper assets are playing second fiddle.

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 industrial assets will be sticking around to share the stage.

First Half Results

Anglo has dramatically improved its operating performance, with productivity up 20%. That has been supported by a 30% increase in average market prices, particularly in metallurgical coal and iron ore. However, stronger producer currencies have weighed on reported results.

Improved operating performance and a supportive price environment delivered a 68% increase in EBITDA (earnings before interest, tax, depreciation and amortisation) to $4.1bn, on total revenues of $12.1bn, up 22%.

The Iron Ore and Coal divisions were by far the biggest contributors to group, with EBITDA of $1.2bn and $1.4bn respectively. The De Beers diamond business also grew EBITDA, to $786m, as increased production helped offset a 12% decrease in the average realised price for rough diamonds. Anglo acquired LVMH Moet Hennessy Louis Vuitton's 50% shareholding in De Beers Diamond Jewellers in March, with its 29 stores around the world.

The group's smaller divisions, Copper, Platinum and Nickel all made positive contributions to group EBITDA, with Copper rising 38% to $586m.

Free cash flow of $2.7bn is up from $1.1bn in the equivalent period last year and helped the group slash debt by 27%, from $8.5bn at the end of the last financial year to $6.2bn. Anglo's dividend policy going forwards will target a pay-out of 40% of underlying earnings.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.