First published 24 January 2011.
[miningmx.com] — ANGLO American is the preferred stock of diversified miners available to JSE investors, if only because analysts feel the company still has to play some catch-up to BHP Billiton.
“We continue to prefer Anglo over BHP,’ says Deutsche Securities in a recent note. “We think Anglo has further value to be realised from non-core asset sales, delivery of growth and de-gearing leading to further growth project approvals.’
BHP Billiton is a more defensive stock, it feels. “As the go-to stock in the sector it is more fairly valued,’ the bank adds.
Since January 2010 shares in Anglo have gained about 8.5% in rands, less than BHP Billiton, and less than its peers on other exchanges, such as London. The JSE’s Alsi and the resources indices have both outperformed Anglo, gaining under 20% over the same period.
It was this scenario of underachievement that led Absa Asset Management to declare Anglo capable of a 33% share price rise this year, helped in no small degree by China’s demand for metals. While all miners benefit from bull markets, the feeling is that wedged between a divestment strategy and then the passive aggressive merger of equals staged by Xstrata, Anglo has been given short shrift by investors.
“It’s not unbelieveably cheap, but there’s definitely something left,’ says Henk Groenewald of Coronation Asset Management. “We like the company,’ he says of the share price performance. Like Deutsche, Coronation thinks Anglo has a similar positioning of its peers relative to China demand, but has been unduly neglected.
The reason for wondering about Anglo is last week’s impressive production updates from both BHP and Rio Tinto. Anglo doesn’t provide Q2 or Q4 updates but reports the figures in its interim and full-year announcements, the latter due on February 18. However, there’s interest in whether Anglo can match its rivals, both of whom posted extremely strong iron ore figures.
In essence, Anglo has cost-constrained platinum operations, an extremely strategic commodity that most of the other diversifieds don’t have, an ex-growth diamond business, thermal and metallurgical coal here, in Australia and South America as well as base metals, predominantly in South America.
Its other defining feature is its exposure to South Africa, replete with labour difficulties, regulatory posers and the increasingly recurring infrastructural challenges from which many emerging economies suffer.
Maybe, however, it’s Anglo’s ability to capitalise on constrained iron ore supply that is a major question of its future attractiveness. Kumba Iron Ore is an obvious niche jewel in the crown.
RBC Capital Markets analyst Des Kilalea says even with the normal holding company discount, the 64%-owned Kumba Iron Ore warrants an upgrade in Anglo’s valuation. “Expected strong results from Kumba… should carry Anglo,’ he says in a note dated January 18.
JUDGEMENT SCRUTINISED
Yet it’s all about Minas Rio, the Brazil-based project for which Anglo paid $6.6bn (along with the iron ore prospect Amapa, also in Brazil). It then had to stump up a further $750m in project overruns, over and above the $3.8bn capital investment required. The huge cost of entering this market when it did still hampers Anglo and raises questions about management judgement. “There’s still some negativity about the asset,’ says Groenewald. “There are still uncertainties on what it’s worth.’
The fact is these projects, which won’t start contributing to Anglo until 2012, are hardly hammered on economic certainties. Much, too, hangs on the Los Broncos copper expansion and the Barro Alto nickel project. Without them, Anglo is in danger of shrinking. Last year, it sold $2.2bn in mining and non-mining assets deemed non-core. Part of this strategy is to deleverage the balance sheet which, coupled with rising metal prices, may see Anglo build on its project pipeline with more gusto.
De Beers has seen an interesting turnaround, but its mining business is receding; the other jewel in Anglo is Anglo Platinum, whose main thrust is to narrow down costs further. Macquarie First South said in a note last year that cost targets were missed, but not disastrously so. It’s thought not much additional cost, maybe 2% to 3% above the consumer price index, could be achieved.
Anglo trades on a price to earnings ratio of 16.5. This is against the slightly less demanding 15.7 on which BHP Billiton trades, and yet the feeling remains there’s a gaping span between the two. Is Anglo’s value then just a question of it having suffered relative neglect in the past?
BHP has never had the criticism waged against it suffered by Anglo CEO, Cynthia Carroll, but a frequently unrecognised point is that Anglo carries a century of legacy the carefully crafted BHP and Billiton merger never has had to contend with.
“The Oppenheimers would be turning in their graves several times having seen what the UK asset managers have put the company through,’ says Stephen Meintjes, an analyst for Imara SP Reid. “Buy this, sell that. But the company has probably got down to its fighting weight,’ he adds.
