Business Overview
Anglo American Plc (LON: AAL) is an international mining group having operations in Australia, Southern Africa, South America and North America, and is headquartered in London, United Kingdom. The company’s primary activities include mining, exploring and processing of minerals and metals at various geographies globally. The company’s portfolio of minerals and metals include thermal coal, manganese, nickel, iron, diamonds, platinum and copper. The company seeks to secure, develop and operate a portfolio of high quality and long-life resource assets that offer an attractive long-term value creation potential through sustainable cash flow and returns. The group focuses on innovative practices and technologies to offer a high-quality range of products. The company also undertakes exploration projects, which is divided into brownfield exploration to identify resources close to existing operations and greenfield exploration to find entirely new resources.

Stuart Chambers is the Chairman of the group and was appointed in November 2017. Mark Cutifani is the Chief Executive Officer of the group since April 2013. The CEO is supported by Stephen Pearce, who is the Finance Director.

Key Statistics



Top Shareholders


(Source: Thomson Reuters)

Recent News

On 4th February 2020, Anglo American announced that as a part of its buyback programme announced on 25th July 2019, the company had purchased 200,260 shares at US$0.54945 per share from Goldman Sachs International.

On 3rd February 2020, Anglo American announced that as a part of its buyback programme announced on 25th July 2019, the company had purchased 207,407 shares at US$0.54945 per share from Goldman Sachs International.

On 29th January 2020, Anglo American announced that it had received value amounting USD 545 million for De Beers' first sales cycle of the year 2020 on the sale of the rough diamond.

On 20th January 2020, Anglo American announced that Bidco (Anglo American Projects UK Limited) had reached an agreement with Sirius (Sirius Minerals Plc). As per the agreement, Bidco will acquire entire share capital (issued and to be issued) of Sirius on Cash (cash acquisition) as per Companies Act Part 26.

Production Update (for the fourth quarter ended 31^st December 2019)

On 23rd January 2020, Anglo American released an update for the Production in the fourth quarter ending 31^st December 2019. The company met the set production target for full-year and driven by successful ramp-upactivities at Brazil-based Minas-Rio, the Production surged by 4 per cent. The production at Australian based Metallurgical Coalincreased, while the production at Los Broncesand De Beersare expected to be on the lower side.Due to higherthroughputand grades, the volumes of palladiumand platinumincreased by 10 per cent for the period. Driven by progress in P101 levels of equipment performance and stability of operations, the company showed robust performance from its Bulks business. In the Q4 FY2019, the company at Minas-Rio produced high-grade iron ore of 6.2 million tonnes. Following the maintenance activities, the company’s iron ore production improved to 11.8 million tonnes at Kumba.

Segment Information


(Source: Annual Report, Company Website)
 
The operations of the group are differentiated in six core operating segments, namely De Beers, Copper, Platinum Group Metals, Iron Ore, Coal, and Nickel and Manganese. De Beers segment includes rough and polished diamonds under the De Beers Group, which is produced around a third of the rough diamonds of the world and has a global leadership position in diamonds. The Copper segment boasts a world-class asset position of the group in copper, underlined by Quellaveco project in the south of Peru, polymetallic Sakatti deposit in Finland, Collahuasi mine and Los Bronces Mine. The Platinum Group Metals division is a leading producer of platinum group metals, with flagship platinum mine, Mogalakwena, and consists of ownership of the group in Anglo American Platinum Limited. Iron Ore segment operations provide customers with high iron content ore and include mines and ownership in several countries and companies. The Coal division includes metallurgical coal and thermal coal, with thermal coal assets in South Africa and Colombia, and metallurgical coal assets in Australia. The Nickel and manganese segment include nickel, manganese ore and alloys, with manganese assets in South Africa and Australia and nickel assets in Brazil.

Financial Highlights – H1 Financial Year 2019 (30^th June 2019, USD, million)


(Source: Interim Report, Company Website)
 
In the first half of the financial year 2019, revenue during the period rose by 8 per cent over the year to $14,772 million, up from $13,698 million in H1 2018, as stronger prices for certain products more than offset price weaknesses elsewhere, reflecting benefits from diversification. As the company was able to control its expenses, operating costs remained largely flat at $11.4 billion against $11.2 billion in H1 2018, while operating profit rose to $3.34 billion versus $2.43 billion in the prior year. Group’s underlying EBITDA rose by 19 per cent to $5.5 billion (30 June 2018: $4.6 billion), while profit before net finance costs and tax rose to $3.59 billion from $2.755 billion in H1 2018. Underlying profit before net finance costs and tax also rose to $3.83 billion against $2.95 billion in the first half of 2018. Reflecting strong prices, particularly for the PGMs basket and iron ore, group’s Mining EBITDA margin increased to 46 per cent (30 June 2018: 41 per cent). Average market prices contributed $0.7 billion of improvement to underlying EBITDA as the average price of a basket of commodities and products increased by 2 per cent, while the weaker South African rand boosted underlying EBITDA by $0.5 billion. Despite a decent cost performance, lower volumes in the period drove down underlying EBITDA by $0.3 billion, while the impact of inflation on costs reduced underlying EBITDA by $0.2 billion, as weighted average CPI for the period was 3 per cent. Profit before tax was $3.38 billion, against $2.44 billion in H1 2018, while underlying profit before tax rose to $3.62 billion versus $2.76 billion H1 2018. Profit for the financial period rose by 52 per cent to $2.5 billion (30 June 2018: $1.6 billion) and underlying profit for the period was $2.65 billion against $1.95 billion in the first half of 2018. Though an increase in the profit attributable to non-controlling interests reduced the group’s underlying earnings attributable to shareholders but a 19% increase in the EBITDA, drove it to $2.0 billion (30 June 2018: $1.6 billion), while total profit attributable to equity shareholders rose by 46 per cent to $1.88 billion. Underlying earnings per share rose by 28 per cent to $1.58, helping the company to announce a 27 per cent increase in the dividend to $0.62. Net debt was 0.3x underlying EBITDA as net debt increased to $3.4 billion, and $1.3 billion of attributable free cash flow was reported during the period. Attributable return on capital employed increased to 22 per cent (30 June 2018: 19 per cent).

Financial Ratios

 
(Source: Thomson Reuters)

The reported EBITDA margin in H1 FY2019 surged by 5 per cent to 33.7 per cent in the first half of the financial year 2019 versus 28.7 per cent in H1 FY2018and stood higher as compared to the industry median. The reported operating margin in H1 FY2019 was up by 6.2 per cent to 22.7 per cent from 16.5 per cent reported last year for the same period. The reported Pretax margin of 22.9 per cent for the H1 FY2019 remained higher as compared to the industry median of 9 per cent. Net margin reported was 16.9 per cent for the first half of the financial year 2019, reflecting an increase of 4.9 per cent when comparedwith last year data for the same period. Return on equity for the first half of the Financial year 2019 stood at 7.8 per cent, which was higher than the industry median of 4.1 per cent. On the liquidity front, Anglo AmericanPlc’scurrent ratio was higher than the industry median of 1.67, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Anglo AmericanPlc’swas 0.42x, which was lower as compared to the industry median of 0.57x, reflecting that the company is less leveraged as compared to its peers.

Share Price Performance


Daily Chart as of February 5^th, 2020, before the market close (Source: Thomson Reuters)

Anglo American Plc shares were trading at GBX 2,099.50 at the time of writing before the market close (at 9:49 AM GMT) on 5^th February 2020 and were up by 1.59% versus the previous day closing price. Stock's 52 weeks High is GBX 2,294.00 and Low is GBX 1,654.80. Stock’s average traded volume for 5 days was 2,728,347.20; 30 days – 2,596,318.73 and 90 days – 3,241,430.13. The traded volume (average) for 5 days was up by 5.09 per cent versus 30 days average traded volume. The group’s stock is reflecting significantly higher volatility as against the benchmark index based on the company’s beta of 1.61. The shares of the company have delivered a positive return of 8.62 per cent in the last nine months. The company’s stock has given investors 2.56 per cent of a positive return in the last month. The outstanding market capitalisation was around £28.18 billion, with a dividend yield of 4.54%.

Valuation Methodology.

Method 1: Price to Cash Flow Approach (NTM)


To compare Anglo AmericanPlc withits peers, Price/Cash Flow multiple has been used. The peers are Centamin Plc (NTM Price/Cash Flow was 11.61), South32 Ltd (NTM Price/Cash Flow was 6.25), Kaz Minerals Plc (NTM Price/Cash Flow was 4.04), Ferrexpo Plc (NTM Price/Cash Flow was 2.77) and Gem Diamonds Ltd (NTM Price/Cash Flow was 1.64). The Average of Price/Cash Flow (NTM) of the company’s peers was 5.26x (approx.)


Method 2: Enterprise Value to EBITDA (NTM)



To compare Anglo American Plc withits peers, EV/EBITDA multiple has been used. The peers are Ferrexpo Plc (NTM EV/EBITDA was 3.40), Gem Diamonds Ltd (NTM EV/EBITDA was 3.56), Centamin Plc (NTM EV/EBITDA was 4.40), Antofagasta Plc (NTM EV/EBITDA was 5.75) and South32 Ltd (NTM EV/EBITDA was 5.06). The Average of EV/EBITDA (NTM) of the company’s peers was 4.40x approx.)

Growth and Risk Assessments

The company has many value-accretive projects in the pipeline with low risk and higher production. The company is well-positioned to take benefits from growth trends across the energy and industrial markets. The company using its cost synergies, had optimized its operational structure to achieve sustainable growth in the future. The company operates inmultiple geographies due to which its profits can be impacted negatively due to foreign exchange rate fluctuations. Many environmental factors such as rainfall, drought etc. also determine the level of production achieved by the company. Technological developments have led to the artificial production of higher quality gem synthetics, which can have a potential loss of rough diamond sales, resulting in a negative impact on revenue.

Conclusion

The company has shown a good top-level and bottom-level performance in the current financial year. The Operating Model implementation by the group is continuing to deliver improvements, as the group focuses on efficiency and productivity, which can be seen in the improved margins of the group.

The company benefits from a range of high margin, high return and fast payback options within its existing portfolio, which is complemented by industry-leading explorations projects and backed by the best technical experts in the industry. The demand for polished diamonds has increased from Chinese and US retailers, and this can help the company. The company is planning to increase its production from its old and new operations in the coming future. 
 

Over the course of 3 years (FY15 - FY18), the company’s revenue surged from USD 20,455 million in FY15 to USD 27,610 million in FY2018. Compounded annual growth rate (CAGR) stood at 10.52 per cent.

Based on decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 1,992.40 (as on 4^th February 2020, with lower double digit upside potential, based on 5.26x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 4.40x NTM EV/EBITDA (approx.) on FY19E EBITDA (approx.).
 
 
*All forecasted figures and peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 USD = 0.76588 GBP.
* The “Buy” recommendation is also valid for the current price as covered in the report as on 5^th February 2020.

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