Anglo American PLC (LON: AAL) – Operational agility underpins underlying EBITDA of $3.4 billion in H1 FY20.

Anglo American PLC is FTSE 100 Mining Company with 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 portfolio of minerals and metals include thermal coal, manganese, nickel, iron, diamonds, platinum, and copper. It seeks to secure, develop, and operate a portfolio of high quality and long-life resource assets that offers an attractive long-term value creation potential through sustainable cash flow and returns. It focuses on innovative practices and technologies to offer a high-quality range of products. It 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. It employs over 90,000 employees globally. Moreover, it is committed to being carbon neutral by 2040 across all operations.

On 22 October 2020, the Company is expected to report Q3 FY20 production update.




 (Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

During the first half of 2020, all parts of the diamond supply chain and retail sales were impacted by the global lockdown. However, a gradual reopening of diamond polishing and cutting centres at the end of May has improved sentiments. The market outlook is highly uncertain due to the possibility of a second wave of Covid-19. The significant challenges for rough diamond demand may continue in the short run with travel restrictions.

There are several global trends which influence the mining industry, such as transition towards lower emission transport, changing demographics, regulatory expectations, changing the physical environment of mining, among others. The market size for the Global Strategic Mineral Materials market is projected to grow at a compounded annual growth rate of 6.4 per cent from 2018 to 2026, according to the report from the Research and Markets. As per the Acumen Research and Consulting, the market size for the copper industry will be around US$222 billion by 2026. The demand for copper is consistently growing, primarily driven by urbanization (includes demand for power generation and transmission), economic development (includes development related to infrastructure, transport, and construction), and the newly rising demand for electric vehicles and renewable energy.

Growth Prospects and Risk Assessment

Anglo American PLC has been delivering resiliently in volatile times with decent financial and unchanged production guidance, which underpins that it is well-positioned for the future. The Company has delivered cash returns of around US$ 5 billion in the form of dividends & buybacks since 2017. Further, it has been keeping net debt to EBITDA lower than 1.5x and providing EBITDA margin of 45% to 50% consistently over the years. It has many value-accretive projects in the pipeline with low risk and higher production. It is well-positioned to take benefits from growth trends across the energy and industrial markets. Further, it is leveraging to optimise the operational structure to achieve sustainable growth in the future.

 
(Source: Presentation, Company Website)

 
Moreover, the diversified portfolio of metals makes them well-positioned for a sustainable future. In addition, it continues to improve from safety, health, and environmental perspective, and it aims to be carbon neutral by 2040 across all operations.


(Source: Presentation, Company Website)

However, AAL is exposed to a variety of risk and uncertainties, which may have a reputational, financial, and operational impact on the Company. It includes catastrophic risk to business operations, prices of products or metals, health pandemic causing a risk to production and labour costs, change in regulatory or political uncertainties, future demand and supply chain trends for diamonds, availability of water supply, future demand for Platinum Group Metals, and evolving expectations and requirements of stakeholders.

The image given below reflects the impact of COVID-19 disruption over the production.


(Source: Company Website)

Segment Analysis

The Company operates with seven segments, namely De Beers, Platinum Group Metals, Copper, Coal, Iron Ore, Nickel and Manganese, and Corporate and Other. Even by geography, the Company has a quite diverse portfolio of assets, which can be seen in the picture below:

  
(Source: Presentation, Company Website) 

Synopsis of Recent Developments

28 July 2020: AAL’s board has approved the Kapstevel South project at Kolomela mine, with a total capital cost of nearly R7 billion (including pre-stripping). It is estimated that the addition of Kapstevel South pit will deliver an EBITDA margin of >35% in the long-term.

10 June 2020: The Company announced the stoppage of the ACP (Anglo Converter Plant) Phase B due to water leak; however, it would not affect the production guidance for the full year.

17 March 2020: The Company completed the acquisition of Sirius Minerals PLC for a cash consideration of US$0.5 billion. It also recognised a lease liabilities and borrowings with a fair value of US$0.3 billion, as a part of the acquisition.

Key Shareholders

Non-Financial Key Performing Indicators

The image below depicts the consistent focus on safety & health measures, which has resulted in a decline in number of work-related fatal injuries, total recordable case frequency rate (TRCFR), new cases of occupational disease (NCOD). Moreover, the Company has put remarkable efforts to safeguard the environment by saving Energy Consumption, Greenhouse Emission, and Total Water Withdrawals.


(Source: Annual Report, Company Website)

Financial Highlights (H1 FY2020) – Reflecting Strong Balance Sheet Position


(Source: Company Website)

On 30 July 2020, the Company provided a half-year result for the six months ended 30 June 2020, with decent results reported from the Brazilian iron ore and Chilean copper operations. In the first half of 2020, the revenue decreased by 16% year-on-year to US$12.5 billion (H1 FY19: US$14.8 billion), driven by lower production. Underlying EBITDA decreased by 39% year-on-year to US$3.4 billion in H1 FY20 (H1 FY19: US$5.5 billion). Led by the impact of the Covid-19 pandemic on production across the assets in Southern Africa and the decrease in the price for the Group's basket of products, the Company Mining EBITDA margin was lower than for H1 FY19 at 38%. Profit attributable to equity shareholders for H1 FY20 reduced by 75% year-on-year to US$0.5 billion (H1 FY19: US$1.9 billion).

Including related derivatives, the net debt increased by US$3.0 billion (as compared with FY19)  to $7.6 billion in H1 FY20, due to the acquisition of Sirius Minerals Plc of US$0.7 billion, attributable free cash outflows of US$1.3 billion, the purchase of ordinary shares and the payment of dividends to shareholders of US$0.6 billion. On 30 June 2020, the net debt represented a gearing of 21% (December 2019: 13%), with gross debt (including related derivatives) of US$13.9 billion (December 2019: US$11.0 billion) and cash and cash equivalents of US$6.3 billion (December 2019: US$6.3 billion). The Board has proposed a dividend per share of US$0.28 for the first half of 2020 (30 June 2019: US$0.62), which is equivalent to US$0.3 billion (30 June 2019: $0.8 billion). Growth capital expenditure for H1 FY20 rose to US$0.6 billion as compared with the corresponding period of the last year (30 June 2019: $0.1 billion). Moreover, it is aiming to be carbon neutral across the operations by 2040.

Operational Performance (H1 FY2020)

The Company has delivered a strong performance in the Minas-Rio iron ore operation (situated in Brazil) and the Collahuasi copper operation (located at Chile). This will help to mitigate the overall decline in production of 11% on a copper equivalent basis. At the end of June 2020, operations were accelerated to around 90% of production capacity. Due to the impact of Covid-19 lockdowns on production at the southern African operations, De Beers’ rough diamond production reduced by 27% year-on-year to 11.3 million carats (30 June 2019: 15.6 million carats). Overall copper production declined by 2% year-on-year to 313,900 tonnes (30 June 2019: 320,200 tonnes), with a decrease of 18% in production at Los Bronces and an increase of 27% in production from Collahuasi.

Palladium and platinum production decreased by 21% year-on-year to 531,600 ounces and by 25% year-on-year to 748,300 ounces, respectively. Minas-Rio production surged by 17% year-on-year to 12.6 Mt in H1 FY20, reflecting a continued robust performance. Nickel’s production climbed by 11% year-on-year to 21,700 tonnes (30 June 2019: 19,600 tonnes).

Financial Ratios

 
 

Reported profitability metrics for the first half of the financial year 2020 stood in line as per the industry benchmark, reflecting higher revenue generated and better control over expenses. On the liquidity front, Anglo American Plc’s current ratio was marginally lower than the industry median. The Group has sufficient current assets to pay short-term obligations. On leverage front, the debt-equity ratio was 0.61x, which was higher as compared to the industry median of 0.54x, reflecting that the company is slightly more leveraged as compared to the industry.

Share Price Performance Analysis
 

Daily Chart as on 19 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 19 August 2020, at the time of writing (before the market close, at 8:30 AM GMT+1), Anglo American Plcshares were trading at GBX 1,904.60, down by 0.62% against the previous day closing price. Stock 52 week High and Low were GBX 2,266.00 and GBX 1,018.20, respectively.

Bullish Technical Indicators

From the technical standpoint, the shares were trading well above the short term support level of 50, 100 and 200-day simple moving average prices, which reflects an upward trend in the stock.Also, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price. MACD line is placed above the central line, indicating a bullish setup. The Company’s stock has delivered a positive return of around 16.60% in the last three months.

Anglo American Plc Vs FTSE 100 Index (1 Year)

 
(Source: Refinitiv, Thomson Reuters)

In the last one year, Anglo American Plc share price has delivered 9.68% return as compared to the negative 15.65% return of FTSE 100 index, which shows that the stock has outperformed the index during the last one year.

Valuation Methodology

EV/EBITDA Approach (NTM)

To compare Anglo American Plc with peers, EV/EBITDA multiple has been used. The peers are Antofagasta Plc (EV/NTM EBITDA was 7.34x), Ferrexpo Plc (EV/NTM EBITDA was 4.02x), Kaz Minerals Plc (EV/NTM EBITDA was 5.68x), BHP Group Plc (EV/NTM EBITDA was 7.23x) and Glencore Plc (EV/NTM EBITDA was 6.12x). The Average of EV/NTM EBITDA of the Company’s peers was 6.08x (approx.).
 
Business Outlook Scenario

The production guidance for diamond remains unchanged at 25-27 million carats for FY20, subject to the recovery in demand and extend of Covid-19 disruptions. Similarly, the production guidance for copper remained intact at 620,000-670,000 tonnes, which is dependent on water availability and impact of the pandemic. Adjacently, the production guidance for Platinum Group Metals remained unchanged at 1.0-1.2 million ounces of palladium and 1.5-1.7 million ounces of platinum. However, production guidance for metallurgical coal has been revised to around 21 million tonnes due to lower production at Cerrejón in response to reduced demand.

In the longer-term, the Company is well-positioned to take benefits from growth trends across the energy and industrial markets. Also, the completion of the UK Woodsmith polyhalite project should generate synergy in future. Presently, most of the Company’s sites across the world are operating with appropriate safety measures.

The Company benefits from a range of high margin, high return and fast payback options within the existing portfolio, which is complemented by industry-leading explorations projects and backed by the best technical experts in the industry. The Group is planning to increase the production from old and new operations in the coming future. Moreover, the Group appears to be resilient with operating and capital expenditure cut in 2020. Adjacently, integration activities of Sirius Minerals PLC have been progressing well, and it is expected to incur US$300 million capital expenditure for FY20 to develop a major new polyhalite project in the UK.


(Source: Presentation, Company Website)

Over the course of 4 years (FY15 - FY19), the Company’s revenue surged from US$20,455 million in FY15 to US$29,870 million in FY2019. Compounded annual growth rate (CAGR) stood at 9.93%.

Considering the decent business growth rate trajectory, strong business model and support from the valuation as done using the above method, we have given a “BUY” recommendation on Anglo American at the current market price of GBX 1,904.60 (as on 19 August 2020, before the market close at 8:30 AM GMT+1) with lower double-digit upside potential based on 6.08x EV/NTM EBITDA (approx.) on FY20E EBITDA (approx.).
 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement. 
 

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