Anglo American Plc (AGL) is one of the largest commodity producers in the world providing investors with access to iron ore, manganese, metallurgical coal, thermal coal, copper, nickel, platinum group metals, diamonds and other mining and industrial operations.
With the restructure of AGL’s business in October 2009, a more streamlined management structure with dedicated focus on the core mining portfolio was created. Currently, Anglo is the fourth largest producer of iron ore and coal globally; its 80% shareholding in Anglo American Platinum accounts for 40% of global platinum production, while its 85% shareholding in De Beers Diamonds makes up 40% of the world’s rough diamond production.
From an operating profit (or EBIT) perspective, the position is more concentrated, with the iron ore, manganese and copper divisions contributing a combined 70.5% of EBIT for financial year 2012. The platinum division has dwindled from being a 20.6% EBIT contributor in FY 2008 to detracting 1.8% from group EBIT in FY 2012.
The profitability of the manganese and iron ore division is driven predominantly by the operations of Kumba Iron Ore. Despite the impact of well publicised strikes at Sishen, Kumba was able to generate total sales volume of 44.4mt in FY 2012, 2% higher than the sales volume of FY 2011. Kumba has a production capacity target of 70mtpa by FY 2019, according to Source: Integrity Asset Management. The operational expansion remains subject to Transnet’s ability to expand capacity on the Oryx rail line which, upon completion, should be able to accommodate Kumba’s planned expansion.
On the back of the expansion plans, with increased demand from Chinese steel producers and an expected depreciation of the rand over the medium to long term, Kumba should maintain or marginally increase its contribution to Anglo’s EBIT over the medium to long term.
AGL is also investing in the Minas Rio project in Brazil, which is to become one of the world’s largest and most profitable iron ore projects. Initial expected cost for Minas Rio was estimated at $5.8bn, but due to various problems, the cost is now expected to escalate to $8.8bn. First production is now expected in the second half of 2014. The future value of this investment is not priced into Anglo at current valuation levels.
Amplats is the world’s largest producer of platinum. It reported a headline per share loss of R5.62 for FY 2012. This sharp decline in profitability comes on the back of labour unrest resulting in a 17% decline in sales volume and the reduced production, with 306 000oz production lost due to strikes, and sticky mining inflation increas- ing cash cost/unit of production by 21% to R 16 364 per equivalent refined platinum ounce. (Source: Integrity Asset Management)
The platinum market also remains in deficit, albeit marginally, which should be supportive of dollar pricing over the medium to long term. Factoring the expected rand depreciation into forecasts, the ZAR platinum price received should provide support.
From a valuation perspective, the price to EBITDA ratio of Anglo’s unlisted operations at only 6.6 times – this level is quite attractive and should provide an underpin to Anglo’s share price over the medium to long term.( Source: Integrity Asset Management).
With the expected earnings increase as discussed above and our view that Anglo should at least sustain its p:e relative over the investment horizon and even re-rate to its long term p:e relative of 1.1 times, the valuation underpin from unlisted operations and Anglo’s attractive relative valuation, we see significant upside potential from Anglo.