SHARES in Anglo American are being tipped for further gains. Analysts highlighted the quality of the group’s South American copper exposure whilst a relatively strong showing from 85%-owned De Beers drew forecasts of improved diamond pricing.
Bank of American Merrill Lynch picked out a number of areas worth watching in Anglo’s copper portfolio not least of which is “chatter” that it has discovered something in Brazil, a potentially large porphyry “… which today is for free in the Anglo share price”.
“We think Anglo has high quality copper assets (Collahuasi, Los Bronces) and that this is often overlooked in the context of a complicated Anglo ‘wrapper’, said the bank – referring to the group’s other assets some of which are in South Africa.
“From a cost point of view, the assets are broadly second quartile and, once Quellaveco is commissioned, overall costs move lower. Quellaveco will see attributable copper production reach 300,000 tonnes by 2024,” it said.
In July, Anglo announced capital expenditure for the Quellaveco project was estimated of between $5bn and $5.3bn. In terms of the syndication deal with Mitsubishi, the Japanese firm will contribute the initial capital cost of the venture. Quellaveco is expected to have a nameplate capacity in the range of 250,000 tonnes of copper a year.
Anglo’s copper production is expected to increase to 758,000 tonnes annually in 2024 from current output of some 579,000 tonnes/year. “Longer term we see optionality in the business in terms of the ‘Los Sulfatos’ deposit near Los Bronces,” it said.
In reference to the group’s South African exposure, RBC Capital Markets said the risk of potential headwinds from national elections next year were overcome by the fact the group was the only diversified mining firm on its investment radar that was investing enough to preserve its position through the commodity cycle.
The note, primarily about the performance of De Beers’ eighth sight or sales cycle, stated: “Although Anglo American has outperformed the FTSE350 mining index by 17% YTD, we continue to see modest upside in the shares and prefer the diversified commodity exposure even with any headwinds from upcoming South African elections that may arise”.
Anglo said on October 16 that De Beers had sold an estimated $475m in diamonds in its eighth sight, a year-on-year increase of $99m. Sales reflected steady overall demand, said Bruce Cleaver, CEO of De Beers Group. Sales in the eighth sight of 2017 totalled $376m. The sales number for the previous sight of this year was $503m.
Year-to-date diamond sales are at $4.4bn compared to $4.39bn at this point in 2017 which RBC Capital Markets said was “… a fairly resilient performance”. De Beers may have pushed through some of the deferrals from last sale which had “… smoothed the results”.
“Nonetheless this recent sight shows the diamond market is holding in through some of the recent macro volatility,” said RBC Capital Markets. “With production in the diamond space likely to fall in aggregate over the next couple of years, we continue to see the potential for a slight increase in diamond prices over the coming year,” it added.
“We continue to prefer Anglo over BHP,” said another bank which is not permitted to be quoted by media. “We see better value and stronger earnings gearing in CY19 for Anglo vs BHP,” it said, adding that the latest De Beers sight underpinned its view there was limited downside in Anglo’s diamond business. Demand for De Beers’ products holding up well.
“We think the market’s concerns over potential delays at Minas Rio is overdone, and relatively immaterial to our valuation,” it said. Anglo said in April earnings before interest, tax depreciation and amortisation for its 2018 financial year would be between $300m and $400m lower owing to the temporary closure of the Minas Rio iron ore pipeline in Brazil.
Last week, Bloomberg News cited analysts finding benefits for certain diversified miners in the thermal coal price performance. Glencore, for instance, was “… in touching distance” of seeing coal mining profits exceed those from copper for the first time since the Swiss-headquartered group took its shares public in 2011.
Anglo American’s coal earnings nearly trebled in the last four years despite producing less of the mineral and will be 43% of Anglo’s profits this year.
Seaborne coal demand increased more than 9% in the first half, while supply rose by less than 8%, said Bloomberg News citing Glencore. Chinese coal power generation increased by 7.8%, the world’s biggest coal producer said.
