PICK OF THE MONTH
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