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Anglo American - COVID-19 update

Emilie Stevens, Equity Analyst | 27 March 2020 | A A A
Anglo American - COVID-19 update

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Anglo American Ordinary USD0.54945

Sell: 1,697.80 | Buy: 1,698.40 | Change -13.60 (-0.79%)
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In response to a number of government coronavirus restrictions the group is operating at a reduced capacity in multiple sites. Iron ore, platinum, diamonds, thermal coal and copper facilities have all been affected to a greater or lesser degree.

The shares fell 2.4% in early trading.

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Our view

In 2016 Anglo announced a shift to focus on consumer driven commodities - diamonds, platinum and copper.

The decision to diversify made sense in our view. 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.

Today consumer commodities are significant money makers for Anglo in addition to iron ore and coal. But thanks to a rebound in industrial commodity prices, when it comes to the bottom line the latter are still key - accounting for half of profits this year.

Diversification hasn't come at the cost of efficiency either. Anglo's made improvements in cost control and productivity gains - offsetting inflationary headwinds buffeting the sector. And there's more where that came from, with plans to save $3-4bn by 2022.

A combination of better prices and lower costs has done wonders for Anglo's profits and cash generation. That's reflected in the balance sheet too - debt's down from $12.9bn in 2015 to just $4.6bn today.

And while cost savings and lower debt, is generally good business, it's particularly good news right now.

The coronavirus pandemic is having significant human, and economic impacts globally. The prospect of worldwide economic slowdown and even recessions are increasingly real. If sustained, demand for Anglo's commodities, both industrial and consumer, is likely to take a hit. With prices and profits likely to follow suit. So far though commodity prices have generally held up well, with disruption to production facilities limiting supply. Unfortunately it's still too early to say what the longer term demand and supply picture looks like.

Whatever the outcome it looks certain that profits will be lower this year, and since Anglo's current policy is to pay out 40% of earnings as a dividend, shareholder returns probably will be too. Until we have a clearer idea of this, we'd suggest viewing the prospective yield of 5.9% sceptically.

Over the long term we think the rationale for Anglo's diversified approach remains. However, with things likely to get worse before they get better investors could be in for a rocky ride.

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COVID-19 update

South Africa entered a 21-day lock down on 26 March to help curb the spread of coronavirus. Anglo American has implemented a range of health and safety measures in response and there will be reduced operations over the period.

Kumba Iron Ore, which accounted for two thirds of Anglo's 65.5 mega tonnes of ore produced last year, has two mines operating with 50% of the workforce. As a result the volume of iron ore produced is expected to be 2 - 3 mega tonnes lower.

The workforce and production at South African Thermal Coal operations will fall by 50 - 70%. The impact is expected to be a 1.5 - 2 mega tonne reduction of export thermal coal this year. Last year South Africa produced 17.8 mega tonnes out of Anglo's 26.4 mega tonnes in total.

De Beers' Venetia diamond mine is operating at 75% capacity.

Anglo American Platinum continues to operate a few mines on a reduced workforce and with reduced production. Production of refined platinum group metals is also expected be lower following an explosion in the processing plant - production is currently on hold until 25 May.

The Peruvian government has extended its coronavirus lockdown to 12 April. Anglo has temporarily withdrawn the majority of employees and contractors from its Quellaveco copper project in Peru and construction work is significantly reduced - only critical areas of the project continue as normal.

In line with UK government restrictions, Anglo is pausing most construction and development activity at its Woodsmith polyhalite project - the project it acquired from Sirius Minerals this year.

Anglo said production from its major operations in other countries has not been impacted materially to date. The group will provide any additional guidance on its South African and other operations on 23 April 2020.

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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 disclosure for more information.