Friday, 14 February 2014

Anglo American - progress, issues and a new level to embrace volatility

I last wrote about Anglo American at the time of their investor day in December.  It struck me then as a subtly different story than other industry peers (like Rio Tinto who I wrote an update note on here). 

'So with no immediate capex cuts and potentially rising net debt for the next couple of years, is it little surprise that the share has fallen nearly two-thirds from its three year high.  And at best the c. 4.5% dividend yield (about the same as BHP Billiton's) will be held flat.... But is everything lost?  The shares trade at sub book value (just below x0.9 as per and with a 9% ROCE, a large number of second quartile, at least, assets and no big debt maturities for a few years, the company is going to have to see new bad news for the shares to go materially lower versus the peers. The (South) African bias/discount is abating (slowly) as areas such as Brazil and Australia become more important for the group as newer projects come on stream (Rio Minas etc) which is probably a net positive for valuation....In conclusion then a very different story than BHP Billiton or Rio Tinto.  Anglos corporate turnaround methods are not in a style which today pleases the market, but on a weighing machine basis, there is value.  2014 will be an important year regarding the starting points of execution on the 2014-2016 plans...'

The mid-December to mid-January point, in hindsight, was a good pick-up level for the shares (my focus was on a similar opportunity in the gold mining space) and the shares have rallied, including today on the publication of the full year 2013 results (+1.5% as I write)

So what were the key insights from the results?  First, consistent with my post Investor Day write-up, there was lots of use of the word 'underlying' in the financial numbers and debt continues to rise. 

Full year profit trends were materially impacted by price and inflation.  The contrast with yesterday's Rio Tinto numbers is marked (see link mentioned above) but, to be fair, this is as would have been expected.  As noted already, these two companies are at different stages of their underlying business development. 

There were three other interesting charts in the slide pack.  The material South African exposure has been an overhang and inflation pressures there remain the worst of the countries profiled.  Overall this was counteracted by higher production and cost savings in the broader business.  I would say that the big South Africa threat remains general labour relations per se (which clearly could put upward bias on mining inflation in the country). 

Second, I thought this was a useful update of the turnaround plan with a solid proportional shift to the right in stated operational improvements.  That can only be good news although there is still much more work to be done (and reported on in the next few quarters)

Finally, an updated (and slightly clearer) reminder of the quartile positioning of the asset base of the company.  This is the key 'weighing machine' upside scope seen by Anglo American investors. 

The opportunity for Anglo American is clear.  Apply the 15% return on equity target they seen in a couple of years time and it is possible to come up with a 2000p+ share price target.  So today it is all about the journey.  Some of the metrics above are solid and improving but, as noted in December, debt will still be rising for a while and the company remains exposed to many specific (South Africa) and general (China) factors.  I think they are on the right route, so on that basis embrace volatility.  A sub book value price is a start. That's just under 1460p for reference. 

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