Anglo American (AAL) Ordinary USD0.54945
HL comment (25 July 2019)
Anglo American has delivered a 19% increase in half year earnings before interest, tax, depreciation and amortisation (EBITDA) to $5.5bn. That was ahead of market forecasts of $5.1bn. Revenue rose 8% to $14.8bn.
The group increased its interim dividend to $0.62 per share, equal to 40% of first half underlying earnings. It also launched a $1bn share buyback programme.
The shares rose 1.6% on the news.
In 2016 CEO Mark Cutifani announced Anglo would focus on consumer driven commodities - diamonds, platinum and copper.
The logic was straightforward and, in our view, sensible. 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.
Unfortunately it's difficult to recognise that strategy in today's business. Yes copper projects account for a large slice of new investments, but coal and iron ore are the largest contributors to profits. That's because there's been a sharp rebound in industrial commodity prices.
So Anglo now looks like being a diversified, industrial miner. And to be fair, it's made a good fist of it so far. We've seen significant improvements in cost control and productivity gains, offsetting the inflationary headwinds buffeting the sector. And with $0.4bn in cost and volume gains this year, the group has further improvements in the crosshairs.
The combination of better prices and lower costs has done wonders for the balance sheet - debt's down from $12.9bn in 2015 to just $3.4bn today.
That's facilitated the resumption of dividend payments. The official policy is to pay out 40% of earnings providing a prospective yield of 4.3%. That's a bit miserly compared to peers - but Anglo is now pledging to sweeten the deal with share buybacks.
Still, while management has done a good job of picking the core business up off the ground, but we don't think its assets are on a par with those of larger players like BHP and Rio. That's probably reflected in the share price, with a price-to-book ratio of 1.6 times some way below those rivals.
So, Anglo finds itself at the crossroads. One option would be to pursue a programme of acquisitions and expansion to muscle in on the big league. The buyback decision reduces the chances of this, however.
Still, there's also an outside chance Anglo itself gets bought. Vedanta Chairman Anil Agarwal is the group's largest shareholder - with a stake of around 20% - and there have been rumours he would like to put the two companies together. We don't think a deal that big is on the cards, but an asset swap/sale of some form seems very plausible.
Half year results
Group profits were driven by improved performance from the iron ore business. Underlying EBITDA rose from $454m to $2bn after production resumed at Minas Rio, realised prices improved and the group benefitted from weakness in the South African Rand.
Profits also improved at the Platinum Group Metals division, up 61.3% to $824m as price increases and a lower unit cost of production more than offset slightly lower production of palladium and platinum.
However, EBITDA fell in the other divisions.
Weaker pricing ensured Nickel & Manganese margins fell, dragging EBITDA down from $420m to $326m. It was a similar story in Coal, as both metallurgical and thermal coal pricing weakened. Coupled with lower production, this saw profits drop from $1.6bn to $1bn.
Weaker demand for diamonds, on the back of US-Chinese trade wars, led to lower pricing and production volumes (down 11% to 15.6m carats) at De Beers diamonds. Profit fell 27.2% to $518m.
In Copper, underlying EBITDA decreased 18% to $789m, with lower unit costs more than offset by the lower realised copper price, which decreased by 6% to 280 c/lb and a 2% rise in production to 320,200 tonnes.
Underlying net debt fell by $563m to $3.4bn as compared to last year, but increased over the half due to accounting rule changes and higher capital spend on the Quellaveco copper project. That represents a net debt to EBITDA ratio of 0.3x.
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