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Anglo American - Prices + productivity = profits

Nicholas Hyett | 22 February 2018 | A A A
Anglo American - Prices + productivity = profits

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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: 2,761.50 | Buy: 2,765.00 | Change 88.50 (3.30%)
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2017 saw underlying profits grow 48% at Anglo American, hitting $3.3bn thanks to higher commodity prices, increased production and lower costs.

Management have announced a final dividend of $0.54 per share, taking the dividend for the full year to $1.02.

The shares rose 3.5% in early trading.

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Our View

Two years ago Anglo was in pretty dire straits. Debt was almost three times cash profits, while earnings were tumbling and the commodity crash that pulled the rug from under the sector showed little sign of relenting.

Today debts are barely a third of what they were and profits are soaring. 2015/16 seems like a bad dream.

Of course some of that's money for nothing - resurgent commodity prices have added $2.4bn to cash profits and are totally outside the group's control. But there have been significant improvements in operating performance as well, with cost cutting and productivity gains more than offsetting the inflationary headwinds buffeting the sector.

Price recovery and productivity gains allowed the group to reboot the dividend faster than even it had expected. That dividend is a bit miserly when compared to peers though.

The group's official policy is to pay 40% of earnings - a policy it stuck to at the full year. That's not overly generous anyway, and rivals such as BHP Billiton and Glencore have been topping up their minimum with additional sweeteners now conditions have improved.

Anglo could do the same if it saw fit, so the decision to hold back suggests it remains focused on debt reduction. That's not unreasonable, but with net debts around half of cash profits it's certainly not essential.

That raises the possibility that management are considering a shopping spree. That would concern us. Miners have a pretty terrible track record on M&A, and the group would need to make a very compelling case for any purchase.

There's no hint of that at the moment though. The focus is still cost reduction, and although next year's production guidance is a little lighter than previously, productivity targets are ambitious. $3-4bn in productivity and cost gains by 2022 would be the equivalent of almost 50% of 2017 profits.

Unfortunately it's not clear quite what Anglo's plan is beyond those savings. Not so long Anglo was going to focus on consumer driven commodities like Diamonds, Platinum and Copper. That seems to have gone out the window, with the decidedly industrial coal and iron ore driving the recovery so far.

The stock offers a prospective yield of 3.9% for those prepared to wait and see.

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Full Year Results

2017 numbers reflect a dramatic improvement in operating performance, with productivity up 28%. Meanwhile prices of Anglo's commodities rose 16% on average, driven by metallurgical coal, copper and palladium.

Revenues were up 22.8% on 2016, with strong performances across the group. Cost savings more than offset inflationary pressures affecting the sector.

At $1.8bn profits from Coal jumped 93% on the previous year, and were the largest contributor to group. The Iron Ore & Manganese business saw profits jump 81% to $1bn.

Among the smaller businesses Platinum was the stand out performer, with profits more than tripling to $217m. Profits from Copper crept up 4.5% to $370m, while De Beers actually retreated slightly to $528m as lower value mix resulted in a lower average diamond price.

Net debt in the period fell by 47% to $4.5bn in the quarter - driven by a 93% improvement in free cash flow to $4.9bn. Net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) now stands at 0.5 times.

The group is targeting a $3-4bn improvement to EBITDA from production volumes, productivity improvements and cost reductions in the period leading up to 2022.

Find out more about Anglo American shares including how to invest

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.