PICK OF THE MONTH

Financial Mail - Investors Monthly - - Contents -

Re­sources stocks listed on the JSE have, over the past 12 months, en­joyed far bet­ter re­turns than most other sec­tors on the JSE.

This is due largely to a strong global econ­omy (at least in de­vel­oped mar­kets), higher in­dus­trial me­tals and com­mod­ity prices and a weaker rand.

An­glo Amer­i­can was the first di­ver­si­fied min­ing com­pany to start con­sol­i­dat­ing its oper­a­tions and sell­ing off less prof­itable as­sets. Since it started re­struc­tur­ing and re­fo­cus­ing its ef­forts, many other di­ver­si­fied min­ing com­pa­nies have fol­lowed suit. It has now com­pleted its re­struc­tur­ing process and is fo­cus­ing on a few key, highly prof­itable com­modi­ties. Th­ese are plat­inum group me­tals, ther­mal and cok­ing coal, di­a­monds, iron ore, cop­per, nickel and man­ganese.

In search of ef­fi­ciency, An­glo Amer­i­can has started a com­mod­ity trad­ing unit. In gen­eral, min­ing com­pa­nies do not trade in the com­mod­ity mar­ket other than sell­ing the re­sources they mine. This is not the case with Glen­core, which started as a com­mod­ity trad­ing com­pany but later ex­panded into min­ing.

It seems An­glo Amer­i­can has been silently pre­par­ing to take Glen­core on at its own game. There is not much de­tail on this in An­glo Amer­i­can’s re­sults pre­sen­ta­tions, so it is hard to spec­u­late about what ex­actly its goals are in terms of trad­ing in com­modi­ties, but the num­bers don’t lie. In 2013 An­glo Amer­i­can made zero money from trad­ing, or mar­ket­ing, com­modi­ties and by the time it re­ported full-year earn­ings for 2016 its mar­ket­ing di­vi­sion had added a profit of $400m to the bot­tom line.

In­ter­est­ingly, in 2013 60% of An­glo Amer­i­can’s pro­duc­tion was sold through ded­i­cated trad­ing com­pa­nies and by 2016 this had re­duced to 10%.

There is clearly a fo­cus on ver­ti­cally in­te­grat­ing the sup­ply chain within the group. This type of plan­ning and in­te­gra­tion can not only make ad­di­tional prof­its within a new busi­ness unit, but also helps the mines from which the com­modi­ties are com­ing to make more profit by re­al­is­ing bet­ter prices for the com­modi­ties they pro­duce.

Now that the dust has set­tled on the ma­jor shake-ups in terms of the group re­struc­tur­ing it­self, it seems An­glo Amer­i­can once again has an ap­petite for ex­pan­sion. In Septem­ber this year it sub­mit­ted a let­ter of in­tent to the An­golan gov­ern­ment to in­vest in the min­ing sec­tor in that coun­try. It re­quested per­mis­sion from the An­golan gov­ern­ment to ex­plore three ar­eas for base me­tals. Pre­sum­ably, if it gets per­mis­sion to start ex­plo­ration and if it finds re­sources worth min­ing, An­glo Amer­i­can is likely, in the medium term, to be con­struct­ing new mines in An­gola.

It has also en­tered into an earn-in joint ven­ture (JV) with Cana­dian pre­cious and base me­tals firm Lu­minex Re­sources over three Ecuador con­ces­sions. In this agree­ment, it will have the right to earn a 60% own­er­ship in­ter­est in the JV com­pany in re­turn for a to­tal in­vest­ment of $50m and an ad­di­tional $7.3m to be paid over seven years.

The deal also al­lows for An­glo Amer­i­can to ac­quire a fur­ther 10% in­ter­est in the JV en­tity if it funds all the work, up to a de­ci­sion to build a mine on the prop­er­ties within the JV. At this stage, there is no min­ing hap­pen­ing on the prop­er­ties held in the JV, but ex­plo­ration is tak­ing place and, if sat­is­fac­tory min­eral re­sources are found on the prop­er­ties, odds are that mines will go up.

As a fi­nal kicker for the stock, prof­its from coal min­ing show this is be­com­ing one of the most prof­itable ven­tures within An­glo Amer­i­can’s sta­ble. Coal prices have soared dur­ing 2018 and de­mand from China is pick­ing up al­most ev­ery day.

“This is the sweet spot for the coal min­ers,” Ben Davis, an an­a­lyst at Liberum Cap­i­tal Mar­kets, told Bloomberg News. “Chi­nese coal de­mand is through the roof and that’s be­cause do­mes­ti­cally they’re not pro­duc­ing enough. China is im­port­ing more coal than ever be­fore,” he said. Chi­nese coal power gen­er­a­tion in­creased by 7.8% over the past year while se­aborne de­mand has in­creased more than 9% and sup­ply in­creased by only 8%.

Con­sid­er­ing that An­glo Amer­i­can’s coal earn­ings are up three-fold over the past four years, de­spite pro­duc­ing less of it over the pe­riod in gen­eral, it is ex­pected that coal will con­trib­ute about 43% of its prof­its for this year.

From con­sol­i­dat­ing and sell­ing off un­wanted and un­prof­itable as­sets, to fo­cus­ing on the com­modi­ties that make it the most money, to start­ing to trade in those same com­modi­ties to earn higher prof­its, to ex­plor­ing new op­por­tu­ni­ties, it seems An­glo Amer­i­can is on track to pro­vide in­vestors with a solid re­turn.

It has com­pleted its re­struc­tur­ing process and is fo­cus­ing on a few highly prof­itable com­modi­ties

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