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Anglo American - guidance lowered

Anglo American's production is expected to increase in the current year, driven by a ramp-up at its Quellaveco mine in Peru.

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Anglo American's production is expected to increase in the current year, driven by a ramp-up at its Quellaveco mine in Peru, which has helped to offset declines at other sites.

Unit costs are expected to fall by around 2% in 2024, as efficiency measures are projected to more than offset inflationary cost pressures.

Production guidance for the 2024-2026 period has been cut, largely due to operational challenges, particularly in copper, as well as subdued market conditions.

Anglo's now looking to make deeper cost cuts. Overall, between 2023-2026, expenditure's now set to be around $1.8bn lower than previous group guidance.

The shares fell 4.8% following the announcement.

View the latest Anglo American share price and how to deal

Our view

Anglo American's guidance for lower production levels and deeper cost cuts over the next three years hasn't been well received by the market. To some extent, lowering production when prices fall is understandable. The group wants to secure the best value it can for its commodities, so leaving ounces in the ground until prices pick up again makes sense.

But prices are largely determined by forces outside of the group's control. This strategy risks calling the cycle wrong and missing out on some spoils if demand and prices pick back up faster than expected. That's part and parcel of the industry though, so it's important to take a step back.

Looking at Anglo's operations, there's plenty to like.

Its strategy of diversifying between industrial and consumer products makes sense. 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, like that for the DeBeers diamond business, is generally more reliable and can help to pick up the slack in cyclical downturns.

We're supportive of the diverse asset mix, many of which help contribute to the global de-carbonisation effort, which should be a longer-term growth driver too.

In particular, the expansion of its Quellaveco copper mine is starting to deliver. We're also excited about the potential for the Woodsmith project, which will give a fresh avenue into crop nutrients. It's a massive deep mine project, which means getting the planning and build done well is key. That's why the group took a hefty impairment charge in 2022, as the cost and timeline had to be pushed further out.

Delays and impairments aren't ideal, but for a project that expected to be a cornerstone of the business for decades to come - we're happy put this down as a minor blip.

Looking to the balance sheet, last we heard net debt was rising but still only equates to a fraction of cash profits. That also supports a payout policy of 40% of profits. But recently revised guidance means the 4.3% forward dividend yield may come under a little pressure. As ever no payouts to shareholders can be guaranteed.

Over the long term, the diversified approach means it isn't beholden to the fortunes of a single commodity price and we see that as an attractive proposition. Sitting near its long-term average, the valuation doesn't look too demanding, but ongoing production issues and uncertainty over demand for raw materials leaves scope for disappointment in the near term.

Anglo American key facts

All ratios are from Refinitiv. 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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 8th December 2023