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Anglo American - profits up, Minas Rio back in action

Emilie Stevens, Equity Analyst | 20 February 2020 | A A A
Anglo American - profits up, Minas Rio back in action

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Anglo American Ordinary USD0.54945

Sell: 1,633.20 | Buy: 1,634.80 | Change 13.40 (0.83%)
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Revenues finished the year 8% higher at $29.8bn with underlying cash profits (underlying EBITDA) rising 9% to just under $10.0bn. That reflects strong performances in Iron Ore and Platinum Group Metals, as well as favourable currency movements.

A final dividend of 47 cents was announced, taking the full year payment to $1.09, up from $1 last year. The group's completed 80% of its $1bn buyback programme which is due to finish in March.

The shares rose 1.5% in early trading.

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Our view

In 2016 CEO Mark Cutifani announced Anglo would focus on consumer driven commodities - diamonds, platinum and copper.

The logic was straightforward and, in our view, sensible. Demand for things like iron ore and coal is very economically sensitive, because when conditions are tough, plans for new factories and skyscrapers quickly get scrapped. Consumer demand is, by comparison, more reliable.

Fast-forward to today and the strategy continues to play out. Consumer commodities are significant money makers for Anglo and a focus of future investment. But thanks to a rebound in industrial commodity prices, when it comes to the bottom line iron ore and coal are still key - accounting for half of profits this year.

So for now Anglo looks like it'll continue to be a diversified, industrial miner. And to be fair, it's made a good job of it so far. We've seen significant improvements in cost control and productivity gains, offsetting the inflationary headwinds buffeting the sector. And there's more where that came from, with plans to save $3-4bn by 2022.

The combination of better prices and lower costs has done wonders for the balance sheet - debt's down from $12.9bn in 2015 to just $4.6bn today.

That's facilitated the resumption of dividend payments. The official policy is to pay out 40% of earnings providing a prospective yield of 4.2%. That's a bit miserly compared to peers - but as it showed this year Anglo is willing to sweeten the deal with share buybacks.

While management has done a good job of picking the core business up off the ground, we don't think its assets are on a par with those of larger players like BHP and Rio. That's probably reflected in the share price, with a price-to-book ratio of 1.04 times some way below those rivals.

For now it seems Anglo will continue with its diversified approach, with fingers in multiple mines - both industrial and more consumer focussed. There's risk and opportunities for growth in both camps, so as long as they can continue to do it well, it's seems rational for Anglo to spread its bets.

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Full Year Results

Anglo's Iron Ore division was the largest contributor to underlying EBITDA at $3.4bn, up from $1.2bn last year. That reflects a jump in production from 46.5 to 65.5 metric tonnes, following a full year of operations at the Minas Rio mine (reopened in December 2018), together with a higher Iron Ore price and good cost control.

Platinum Group Metals' underlying EBITDA almost doubled to $2bn. While production and costs of extraction remained relatively flat, the average basket price rose 27% - with palladium and rhodium seeing significant price increases.

Last year's most profitable division, Coal, saw profits nearly half over the year to $1.8bn - reflecting price declines in both thermal and metallurgical coal of 30% and 12% respectively. Production and unit costs remained stable.

Copper underlying EBITDA fell 13% to $1.6bn, reflecting a fall in both price and production levels, despite lower extraction costs.

De Beers diamond underlying EBITDA dropped from $1.2bn to $558m, reflecting lower demand for rough diamonds and price pressures, as a result of the growing trend of online instead of high street diamond shopping in the US.

Nickel & Manganese underlying EBITDA fell 25% to $634m, as lower manganese profits offset a rise in Nickel.

Despite an increase in cash generated by operations, higher capital expenditure of $3.8bn (up from $2.8bn) and higher taxes meant free cash flow declined to $2.3bn down from $3.2bn.

Net debt finished the year $1.8bn higher at $4.6bn, reflecting the $800m spent in the ongoing buyback programme, a change to accounting rules and the development of the Quellaveco copper project.

In January this year Anglo announced its intention to acquire Sirius Minerals, the Yorkshire based Polyhalite (fertiliser) miner, in cash for 5.5p per share - valuing Sirius at around £386m. Sirius' board has recommended the offer but it awaits shareholder and regulatory approval.

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