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Anglo American - COVID-19 hits production

Emilie Stevens, Equity Analyst | 23 April 2020 | A A A
Anglo American - COVID-19 hits production

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Anglo American Ordinary USD0.54945

Sell: 1,629.20 | Buy: 1,632.40 | Change 10.40 (0.64%)
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Most of Anglo American's sites continue to operate, but with lockdowns in many markets, the level of operations vary. This has seen Anglo reduce production guidance in some of its key commodities - iron ore, platinum group metals and thermal coal.

Anglo still plan to pay the dividend in relation to the second half of 2019.

The shares rose 1.3% 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.

Consumer commodities are now 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 last year.

However, we expect this year could look a bit different. The pandemic is having significant human, and economic impacts globally. While Anglo's own operations are disrupted by lockdowns, their impact on the global economy is a much bigger risk. If recessions are 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 prices for Anglo's key commodities have generally held up well, but it's still too early to say what the longer term demand and supply picture looks like. Lockdown induced economic slowdowns could start to paint a different one.

That's why financial resilience is key in this battle.

Anglo's going into the crisis in better shape than it's been in previously. Improvements in cost control and productivity, along with better prices has done wonders for profits and cash generation. Which is reflected in the balance sheet too - debt's down from $12.9bn in 2015 to $4.4bn today. That's still a sizeable pile of debt, but we can't knock the progress that's been made.

The group's doing well on the liquidity front too - $14.5bn is significant, particularly with nearly half of it in cash and a large chunk of borrowing with no lending strings attached. Anglo's immediate cost savings provide an important layer of shelter too.

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 5.3% sceptically.

Over the long term Anglo's diversified approach remains sensible. However, with things likely to get worse before they get better investors could there will be ups and downs from here.

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COVID-19 update

The Minas-Rio Iron Ore mine continues to operate at normal levels and guidance remains unchanged. However, the Kumba Iron Ore mine which has been operating at c.50% workforce, expects annual production to drop by 3.5 - 4.5 mega tonnes. Last year Kumba accounted for two thirds of Anglo's 65.5 mega tonnes of ore produced last year.

DeBeer's diamond production has been significantly impacted by South Africa's lockdown, and Indian restrictions impacting manufacturing. Production volumes this year are expected to drop by 7m carats to 25-27m carats. While consumer diamond demand has returned in China, US retail remains impacted.

Lockdown disruptions, mean Platinum, Palladium and Thermal Coal production volumes also expected to drop this year. Volumes in the remaining divisions Copper, Metallurgical Coal and Nickel are unchanged.

Anglo's implemented a number of immediate cash saving measures which will reduce operating costs by at least $0.5bn. This is in addition to a c.$1.5bn earnings benefits from favourable exchange rate movements and lower oil prices. Capital expenditure plans will be also reduced by $1bn this year, with guidance for the year now $4.0 - $4.5bn.

At the end of March, Anglo had liquidity of $14.5bn, with more than $6bn of cash. There are no covenants (lending restrictions) associated with the group's bonds or $4.5bn undrawn revolving credit facility.

Lockdown and economic uncertainty is expected to delay existing and planned projects. However, the group's Quellaveco copper project in Peru is still expected to launch in 2022 and essential work is continuing at the Woodsmith polyhalite project - the project it acquired from Sirius Minerals this year.

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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.