Anglo American (AAL) Ordinary USD0.54945
HL comment (29 July 2021)
Anglo American's first half revenue rose 114% to $21.8bn and underlying cash profits (EBITDA) rose 262% to $12.1bn. This was primarily the result of higher average prices for many of the group's commodities.
The group will pay an interim dividend of $2.1bn, equal to $1.71 per share, plus a further $1bn special dividend ($0.80 per share) and $1bn of share buybacks.
The shares rose 4.7% in early trading.
Boy is it a good time to be a miner. Anyone digging stuff out of the ground has been making money hand over fist recently, and Anglo's no different - posting record cash profits for the half year.
Supply constraints and government stimulus have combined to boost several key commodity prices. Anglo's average iron ore price rose from $90 to $210 per tonne, rhodium from $9,254 to $24,662 per ounce and Copper from $2.50 to $4.60 per pound. Unsurprisingly, this has done wonders for the bottom line.
However, there's no guarantee prices will stay high. Eventually, supply bottlenecks should work themselves out and economies will hopefully return to normal, so this mining boom could be short lived. On the other hand, prices could remain elevated for a while yet, and should help act as a natural inflation hedge should that become an issue.
Anglo's strategy of diversifying between industrial and consumer products makes sense to us. 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.
However, a global recession is still a possibility. If we enter a sustained recession, demand for Anglo's commodities, both industrial and consumer, is likely to take a hit. Prices and profits would likely follow suit.
That's why financial resilience remains key.
Fortunately, massive profits have fixed the balance sheet too, although management is going to give some of that back as dividend payments and share buybacks. To be fair, management had been doing a good job controlling costs and getting debt under control to begin with.
The coal demerger will be welcomed by some - 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. It's also unclear if the demerger will result in a sustained valuation uplift.
Over the long term Anglo's diversified approach remains sensible, but 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 dividends.
Anglo American key facts
- 12m forward Price/Earnings ratio: 7.1
- Ten year average 12m forward Price/Earnings ratio: 10.4
- Prospective yield: 6.2%
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 results)
Iron Ore revenue more than doubled to $6.9bn and cash profits rose from $1.8bn to $4.9bn. This was primarily because the average price rose from $90 to $210 per tonne, as sales volumes decreased slightly and costs rose from $25 to $33 per tonne. Capital spending for the division was $278m, up from $235m last year.
Platinum Group Metals delivered an increase in cash profits from $610m to $4.4bn. This was primarily thanks to a 47.4% increase in average prices, driven by rhodium, and sales volumes more than doubling. Costs per PGM ounce rose 15% to $866, reflecting a strong South African Rand and higher input costs. Capital spending for the division was $363m, up from $200m last year.
Copper cash profits rose from $706m to $1.9bn, reflecting an increase in average prices from $2.50 per pound to $4.60 per pound. Unit costs rose from $1.07 per pound to $1.16 per pound thanks to a strong Chilean Peso, higher water management costs and general cost inflation. Sales volumes rose slightly to 305 thousand tonnes and capital spending rose from $729m to $768m.
Diamond division De Beers saw a substantial recovery in sales as volumes more than doubled and prices rose 13.4% to $135 per carat. As a result, cash profits rose from $2m to $610m. Capital spending rose from $159m to $205m.
Metallurgical Coal cash profits remained negative and the division lost $94m compared with $10m last year. This was because volumes fell, which pushed up costs per unit, and prices dipped 4%. Volumes primarily fell due to an underground incident at Grosvenor last year, where production is set to resume later this year, and the temporary suspension of Moranbah due to elevated gas levels. Capital spending fell from $287m to $257m.
Nickel & Manganese cash profits rose from $218m to $289m, reflecting strong Nickel prices. Crop Nutrients was loss making, with cash profits at negative $12m, but the Woodsmith polyhalite project is continuing to progress. Capital spending on the project was $279m.
Attributable free cash flow was $5.4bn, compared to a $1.3bn outflow last year. This reflects much higher cash generation from operations, but this was partially offset by higher taxes and capital spending. Strong cash flows meant net debt fell from $5.6bn at the start of the year to $2.0bn.
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 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.
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