An­glo Amer­i­can

Finweek English Edition - - INVESTMENT -

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.