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Anglo American - diversified portfolio disrupted

Emilie Stevens, Equity Analyst | 30 July 2020 | A A A
Anglo American - diversified portfolio disrupted

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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: 2,637.50 | Buy: 2,638.50 | Change -210.50 (-7.40%)
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First half revenue fell 16% to $12.5bn and underlying cash profits (EBITDA) fell 39% to $3.4bn. Anglo has seen significant disruption from the pandemic, with production volumes falling sharply and lower commodity prices realised.

However, by the end of June Anglo said they were back functioning at 90% capacity across the portfolio. Over the second half, Anglo expects its Platinum Group Metals, Copper, and Iron ore divisions will benefit as the "global economy recovers".

The group declared an interim dividend of 28 cents per share, down from 62 cents last year, in line with the policy to pay 40% of profits.

The shares fell 3.3% 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 as it could bring different growth opportunities and greater resilience. Demand for industrial commodities, 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 more reliable.

But this strategy (at least in the short term) has backfired somewhat, the current crisis has halted many consumer markets, and served to virtually wipe out the Diamond division's profits this half. Thankfully Anglo still has significant exposure to industrial commodities, who had benefited from a rebound in commodity prices leading up to the crisis and which are now rapidly recovering.

Anglo seem to be over the worst of the operational disruptions but the picture for its portfolio of assets is less clear. This year is set to see the biggest contraction in the global economy since WW2, yet industrial commodity prices continue to rise. China's push to get building quickly, is fuelling a lot of it and if other governments follow their lead in trying to spend itself away from deep recession that'll further support prices.

However, more cautious investors could argue that at the moment optimism is running ahead of reality, fuelled by waves of cheap money from central banks. And that economic contractions are still a sizeable risk. If recessions are sustained, demand for Anglo's commodities, both industrial and consumer, is likely to take a hit. Prices and profits could follow suit.

That's why financial resilience remains key.

Anglo went 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. Net debt was also on the way down from the lofty heights of $12.9bn in 2015. At $7.6bn today, it's higher than we'd like but not yet unmanageable - particularly if iron ore, copper and platinum prices stay where they are.

The group's doing well on the liquidity front too - $15.5bn is significant, particularly with nearly half of it in cash and a large chunk of no strings attached credit.

Over the long term Anglo's diversified approach remains sensible, but the near term remains unclear. What does seem more certain is lower profits for Anglo this year. This is important to bear in mind because, with a policy to pay out 40% of profits, lower profits means lower dividends.

Anglo American key facts

  • 12m forward Price/Earnings ratio: 11.8
  • Ten year average 12m forward Price/Earnings ratio: 10.3
  • Prospective yield: 3.5%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results (underlying results)

Anglo's Iron Ore division continues to be the biggest contributor to group profits, this half EBITDA was $1.8bn, down from $2.0bn last year. The decline reflects lower Iron Ore prices realised by both Kumba and Minas Rio operations and a drop in both production and sales volumes at Kumba - reflecting coronavirus disruptions. Unit costs fell at both mines reflecting favourable currency movements and productivity improvements.

Copper EBITDA fell to $706m, down from $789 last year, reflecting an 11% decline in average prices and 2% drop in production - due to lack of water availability at the largest division Los Bronces. Production unit costs fell 21% reflecting cost savings and favourable currency movements.

Platinum Group Metals' EBITDA fell from $824m last year to $610m this half. Despite a 106% rise in realised basket prices, the decline reflects a 25% drop in production, due to coronavirus disruption and shutdowns for repairs.

Diamond division De Beers profits were almost wiped out, falling from $518m last year to $2m this year. The drop reflects a 45% drop in sales volumes and 21% decline in average prices, reflecting the fact that demand from the jewellery industry has been and continues to be "very limited". While the group notes there has been recovery in Mainland China, the US's fate lies in the global economic recovery.

Nickel & Manganese profits fell to $218m (2019: $326m), as a rise in Nickel prices were offset by lower Manganese prices and profits. Coal profits were $23m, down from $996 last year, reflecting significantly lower prices, sales volumes, and production issues in metallurgical coal.

Crop Nutrients, made $4m in cash profits by a fertiliser distributer in Brazil. In the UK the Woodsmith project (following the groups acquisition of Sirius Minerals the Yorkshire based Polyhalite (fertiliser) miner) is progressing well.

Cash flows from operations decreased to $1.5bn (2019: $4.2 billion), reflecting a decrease in underlying EBITDA and a build-up in working capital - reflecting a build-up in inventory.

Capital expenditure rose to $1.8bn, up from $1.4bn last year - reflecting continued investment in the Quellaveco copper project in Peru to be in action 2022 and Woodsmith polyhalite fertiliser project in the UK.

Lower operating cash together with higher spending resulted in a negative free cash of $1.2bn and a rise in debt to $7.6bn (2019: $3.4bn).

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.