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Anglo American - lower commodity prices weigh

Revenue for the half year fell 17% to $18.1bn, as the prices of key commodities fell over the period.

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Revenue for the half year fell 17% to $18.1bn, as the prices of key commodities fell over the period. Lower prices, along with higher costs, meant underlying cash profit (EBITDA) fell 28% to $8.7bn.

The board proposed an interim dividend of $1.24, in line with the groups 40% pay out policy. Total shareholder returns are down 47% on last year.

The shares rose 5.2% following the announcement.

View the latest Anglo American share price and how to deal

Our view

Not six months ago Anglo was hailing record profits. Now, double-digit drops in revenue and profits mean shareholder returns have taken a hefty hit. A stark reminder of how quickly things can change when you are reliant on commodity prices.

Though, whilst these drops may look scary, it's worth remembering they're being compared with some of the best conditions seen in years. Current commodity prices, whilst down on a weaker economic outlook, are still currently high enough for some strong returns.

Return on capital employed, a measure of profitability, of 36% over the first half remains well ahead of Anglo's 15% target and the half year dividend is the second highest every proposed. Remember, no dividends or share holder returns are guaranteed.

Looking at Anglo's operations, there are some things we admire.

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 is generally more reliable, helping to pick up the slack in cyclical downturns.

That's not to say that a severe economic downturn wouldn't dent Anglo's performance, of course.

That's why financial resilience remains key.

Net debt now only equates to a fraction of cash profits. And at this level of debt, that'll still be the case even if profits come down in the future.

The now complete coal demerger will be welcomed by some too - thermal coal is a particularly dirty fuel. Hiving it off from the rest of the group means Anglo can boost its environmental credentials, which could mean more eco-conscious investors would feel comfortable including Anglo in their portfolios. Operationally speaking, coal was already quite a small part of the whole, so this shouldn't change the status quo much.

Over the long term, Anglo's diversified approach means it isn't beholden to the fortunes of a single commodity price. The group already has its fingers in the pies of assets that contribute to the global de-carbonisation effort, which should be a longer-term growth driver too.

But we shouldn't look past the fact the near term remains uncertain - if highly lucrative for the time being. This is important to bear in mind because, with a policy to pay out 40% of profits, lower profits mean lower returns.

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.

Half Year Results (underlying profits)

Diamond division De Beers saw revenue rise 24% to $3.6bn, largely driven by a 58% rise in average realised price. Demand for diamond jewellery in the key US market has continued to post growth, on the record levels of demand seen in 2021. Cash profit (EBITDA) rose 55% to $944m, driven by higher sales and production which more than offset rising input costs. Capital expenditure rose 22% to $250m.

Copper revenue fell 18% to $2.4bn off the back of lower prices and volumes, with the average realised copper price down 13%. Along with 29% higher costs, cash profit dropped 40% to $1.2bn. Capital expenditure increased by 24% to $953m. The Group announced first production of copper concentrate from Quellaveco in the period.

Nickel revenue grew 25% to $407m as prices increases offset lower sales volumes. That fed through to cash profit of $239m, up 77%.

In Platinum Group Metals, a 20% drop in sales volumes meant revenue fell 25% to $5.6bn. Weakening economic demand weight on prices which fell 7% and costs increased 9%. As a result, cash profit fell from $4.4bn to $2.7bn. Capital expenditure rose 9% to $394m.

Iron Ore revenue fell 37% to $4.4bn. Lower prices, sales volumes and higher costs weighed on cash profit which fell 53% to $2.3bn. Capital expenditure rose 54% to $427m.

Steelmaking Coal saw revenue triple to $2.2bn as prices increased 245%. Unit costs rose 29% and sales fell 13%, but the higher revenue meant cash profit rose from $94m to $1.4bn. Capital expenditure was broadly flat at $265m.

Manganese cash profit increased 45% to $223m, as a higher average price offset a fall in sales volumes. Crop Nutrients made a cash loss of $18m, but the Woodside project is progressing with capital expenditure on the project expected to reach $600m over the year.

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
Matt-Britzman
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 28th July 2022