Investor migration forecast for under-valued Anglo American

THE deterioration in the commodities market this year has not dimmed prospects for Anglo American, according to analysts who prefer the stock as it’s undervalued.

“We continue to take a cautious view on the sector with deteriorating economic conditions but Anglo American continues to screen as very inexpensive at 3.5x spot 2019 EV/EBITDA,” said RBC Capital Markets in a report dated July 19. It added that lowering of net debt, the promise of copper production growth from Quellaveco, the group’s Peru project, and the improvement in the diamond market were also positive for the stock.

It also added that “… potential catalysts from releasing value via an alteration of the corporate structure” would also push a migration towards Anglo American. Shares in the company are 6% down over the last month on the Johannesburg Stock Exchange, but some 52% higher on a 12-month basis.

Analysts think that the escalating risk of a trade war between the US and a host of other countries poses a risk to world economic growth. Whilst this may be temporary, and may not materialise at all, there’s still reticence by mining companies to commit to headlong growth, preferring instead to continue paying down debt and provide returns.

Another bank that is not permitted to be quoted by media observed that some of the diversified miners were fully priced; others not. Glencore, discounted by its exposure to the political and regulatory instability of the Democratic Republic of Congo (DRC) was trading at the largest discount to valuation, followed by Anglo American. Both were rated ‘buys’ on the basis of value while platinum group metal counters also offered value.

Anglo American Platinum (Amplats), in which Anglo American has a 79% stake, said in a trading statement on July 19 ahead of its half year results presentation that platinum production would be 2.4 to 2.45 million ounces for the 2018 financial year against the previous expectation of 2.3 to 2.4 million oz “… due to strong operational performance”.

The performance of diamonds through Anglo’s 85%-owned De Beers, was another important tailwind, said RBC Capital Markets. The diamond market price strength at a 4% increase year-on-year was “a positive sign” with prices recovering to $162 per carat. Diamond volumes were also ahead of forecasts, it said.

“The revised lower guidance at Kumba (to align with rail availability) and Thermal Coal (dust at Cerrejon and older South African assets underperforming) should have almost an imperceptible impact on our financial forecasts,” the bank said of Anglo.

Anglo reported a 6% increase in total production on a copper equivalent basis in the second quarter of 2018, compared to the same period of 2017, although this excluded the Minas-Rio stoppage. Anglo normalises copper equivalent production for Minas Rio, and for Bokoni Platinum Mines where production is also suspended pending a sale.

“We have delivered another strong performance, with copper and metallurgical coal in particular driving a 6% increase in production,” said Mark Cutifani, CEO of Anglo American in the group’s second quarter production announcement. “This reflects our consistent and relentless focus on driving efficiency and productivity from our existing world class asset base,” he said. Anglo is due to report its half-year financial results on July 27.