ii view: Anglo American confirms production disruption

This diversified miner has suffered, but does largely unchanged production guidance offer confidence?

Second-quarter production update to 30 June

• Total production down 18%
• Diamond production down 54%
• Copper output up 5%
• Metallurgical coal down 32%
• Now at 90% of production capacity

Chief executive Mark Cutifani said:

"Anglo American has shown resilience in addressing the challenges posed by Covid-19, acting quickly to help safeguard the lives and livelihoods of our workforce and host communities. 

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"Our comprehensive response supported the continuity of the majority of our operations during varying degrees of lockdown in different jurisdictions, albeit at reduced capacity in many cases."

ii round-up:

London and Johannesburg-listed mining giant Anglo American (LSE:AAL) reported a near one-fifth fall in second-quarter production given disruption caused by the Covid pandemic.

But the group, whose commodities include coal, copper and iron ore, plus diamonds via its major shareholding in De Beers, largely retained full-year production targets – already lowered in April.  

Anglo shares drifted 1% lower in afternoon UK trading having fallen by just over 10% year-to-date. Shares for rivals BHP (LSE:BHP) and Rio Tinto (LSE:RIO) are down 1% and up 7% respectively in 2020. 

Covid-19 lockdowns across southern Africa affected De Beers, platinum group metals, Kumba iron ore and thermal coal. 

Metallurgical coal production fell by nearly a third year-over-year, the result of two incidents underground and longwall moves.

On the upside, iron ore production in Brazil rose by 5% given ongoing productivity improvements, while copper output also increased by 5%, aided by a strong performance for its Collahuasi operation in Chile. Group production capacity is now back up to 90% from only 60% back in April. 

Sales for its last financial year reached nearly $30 billion, up from $27.6 billion in 2018. The dividend for 2019 totalled $1.09, up from $1 in 2018 and $1.02 in 2017. 

Anglo had liquidity of $14.5 billion at the end of March including more than $6 billion of cash. 

ii view:

The mining industry is tough and often difficult for managements to navigate. Exploration success, operational issues, staff difficulties, the weather, not to mention trying to second-guess the price direction of the commodity being extracted, can all impact financial performance. Now, the coronavirus is disrupting production and influencing product prices, given reduced demand for such items as aircraft and cars. 

For Anglo specifically, management’s push to improve productivity and reduce debt has been reaping rewards. In 2018, it produced 10% more product on a copper equivalent basis from half the number of assets it had in 2012. Full-year 2018 net debt of $2.8 billion was down 37% on 2017. 

For investors, uncertainty relating to the corona crisis and the length of time it could impact on global economies remains key. Full-year production guidance was previously reduced, but the 2019 final dividend of 47 US cents was paid in early May, suggesting some ongoing management confidence. For now, and while outlook uncertainty cannot be overlooked, a forecast dividend yield in the region of 3%, if paid, is relatively attractive in an income constrained Covid world. 

Positives: 

• A basket of commodities helps even out prices rises & falls across the portfolio    
• Copper output rose by 5%
• The 2019 final dividend was paid in May 2020

Negatives:

• Production down by nearly a fifth
• Economic uncertainty in China – a key market – remains high 
• Operates several tailings dams that could cause severe damage and loss of life if they failed

The average rating of stock market analysts:

Buy