Anglo American PLC (LON: AAL): Robust Financial Position and Sustainable Business Growth Rate Trajectory

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 expects to report Q3 FY20 production update.

 (Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

Anglo American PLC 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 been delivering resiliently in volatile times with decent financial and unchanged production guidance, which underpins that it is well-positioned for the future.

It has many value-accretive projects in the pipeline with low risk and higher production. Therefore, 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 and it aims to be carbon neutral by 2040 across all operations.

 (Source: Company Website, Kalkine Group)

(Source: Company Website, Kalkine Group)

Regarding the risk factors, the Company’s performance is subject to various risks, such as volatility in prices of metallurgical coal, iron ore, and copper. Moreover, the subdued outlook for global economic growth coupled with geopolitical issues can affect foreign exchange rates.  Also, the ongoing COVID-19 disruption can delay commissioning and approval of certain projects. The other risk includes increasing environmental regulations, and failure to achieve operational targets due to the supply chain issues. 

Industry Outlook Dynamics

According to the report from the Research and Markets, 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. 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.

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.

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.

Key Fundamental Statistics

Key Shareholders Statistics

Recent Developments

On 11 September 2020, the Company announced that the latest rough diamond sales cycles for the De Beers was US$436 million. The sixth and seventh sales cycle of 2020 stood at US$116 million and US$320 million, respectively. 

Business Segments

(Source: Company Website)

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 30 July 2020)

(Source: Company Website)

• The Company delivered a strong performance at Minas-Rio iron ore operation, 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, driven by lower production.
• 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’s Mining EBITDA margin stood lower at 38%.
• 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.
• 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).

Operational Performance (H1 FY20)

• 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 - Strong Profitability versus Industry Median (30-June, H1 FY20)

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

 (Source: Refinitiv, Kalkine Group)

On 30 September 2020, at the time of writing (before the market close, at 8:01 AM GMT+1), Anglo American Plc shares were trading at GBX 1,858.40, down by 0.42% against the previous day closing price. Stock 52 week High and Low were GBX 2,266.00 and GBX 1,018.20, respectively.

From the technical standpoint, the shares were trading well above the short term support level of 100-day (GBX 1,839) and 200-day (GBX 1,804.90) simple moving average prices, which reflects an upward trend in the stock.

(Source: Refinitiv, Kalkine Group)

The Company’s stock has delivered a positive return of around 44.15% in the last six months and in the last five years it has delivered ~243.47% return as compared to the negative ~2.59% return of FTSE 100 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology: EV/EBITDA Approach (NTM) (Illustrative)

 (Source: Refinitiv, Kalkine Group)

Business Outlook Scenario

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. It is planning to increase the production from old and new operations in the coming future. Moreover, the Company 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.

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. Overall industry sentiments are more positive now as jewellers in the Chinese and US markets gained confidence ahead of year-end holiday season, which is supported by strong bridal diamond jewellery demand. Subsequently, the Company witnessed a recovery in the seventh sales cycle of the year in rough diamond demand. However, the recovery is at an early stage and the demand might take some time to reach back to pre-Covid-19 levels.

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.

(Source: Presentation, Company Website) 

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 1,858.40 (as on 30 September 2020, before the market close at 8:01 AM GMT+1) with lower double-digit upside potential based on 5.33x 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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