Anglo may miss earnings target
ANGLO American may fall short of earnings targets because of rising inflation in its markets, an extensive capital-expenditure plan and overdependence on asset sales, says a brokerage.
ANGLO American may fall short of earnings targets because of accelerating inflation in its markets, an extensive capital-expenditure plan and over-dependence on asset sales, brokerage Liberum Capital said.
CEO Mark Cutifani, who began a review of operations from Australia to Brazil after joining the Londonbased diversified mining company in April last year, set a goal of at least a 15% return on capital by 2016 selling as many as 16 assets, cutting costs and lifting profit.
“We believe it is too ambitious,” Liberum analysts Ben Davis and Richard Knights said yesterday in a note to investors. “Our estimated 10.8% return on capital employed in 2016 will disappoint investors and with Anglo’s bleak earnings outlook, weak yield and significant project risk, we remain conviction sellers.”
On July 21, Anglo put four platinum mines and potentially two ventures in SA up for sale after agreeing earlier in the month to divest its 50% stake in Lafarge Tarmac to partner Lafarge for at least $1.5bn. Anglo has nine more assets identified for sale.
“Current disposal program could improve 2016 return on capital employed by 4.4%,” Liberum said.
“However, to fully impact the average capital employed in 2016, sales need to be made at or above book value and before the end of 2015. Given the hurdles to asset sales in the platinum and building materials industries, a speedy disposal of Anglo’s underperforming assets should not be taken for granted.”
About 31% of Anglo’s 2014 earnings will come from South African operations, while all of the continent will contribute 67%, according to the note. SA’s economy contracted in the first quarter for the first time since 2009 as the second-biggest African economy battled 25% unemployment and mining industry strikes sapped investor confidence.
Anglo’s first-half profit rose to $1.28bn from $1.25bn on higher output and lower production costs. Return on capital declined to 10% from 11% a year earlier.
Inflation is another hurdle, Liberum said. “On current consensus forecasts, inflation will negatively impact a further $1.7bn, effectively doubling the remaining required $1.4bn targeted uplift.”