ii view: Anglo American ramps up production

Iron and palladium output drive progress at Sirius Minerals buyer Anglo American. 

Production Report for the fourth quarter ended 31 December 2019

• Total production is up 4%
• Iron ore up 16%
• Palladium and platinum up 10%
• Metallurgical coal up 11%
• Diamond production down 16%
• Maintained full-year 2020 guidance across all key commodities

Chief executive Mark Cutifani said:

"We have delivered our full year production targets across the business. Production is up 4% for the quarter led by the continued successful ramp-up at Minas-Rio in Brazil. Increased production at Metallurgical Coal in Australia was offset by the drought in Chile impacting water availability at Los Bronces, as well as the anticipated lower production from De Beers as Venetia transitions to underground in South Africa and Victor reached the end of its mine life in Canada. As planned, we received the operating licence for the tailings dam raise at Minas-Rio before the end of 2019."

ii round-up:

The mining giant’s commodity portfolio spans coal, copper, iron ore, platinum, palladium, nickel and manganese. It also includes diamonds via its major shareholding in De Beers. 

It could soon include farming fertilizer given it is currently in the process of buying Yorkshire potash firm Sirius Minerals (LSE:SXX). 

In 2018, coal was its main revenue generator, followed by diamonds and platinum.  

Listed on both the London and Johannesburg stock exchanges, Anglo American (LSE:AAL) has just reported production in line with analyst’s projections in this fourth-quarter update. 

A 16% hike in iron ore output to 11.8 million tonnes and a 11% improvement in metallurgical coal to 6.3 million tonnes assisted performance. 

A 10% increase in both platinum and palladium production also contributed. Both are used to manufacture emission-reducing catalytic converters for automotive vehicles. Palladium for petrol and hybrid cars. Its price has surged by more than 80% over the past year. 

Rough diamond production fell 15% to 7.8 million carats, hit by lower production in South Africa and Botswana, while copper output declined 13% to 158,800 tonnes, impacted by drought conditions in central Chile. 

In 2019, Anglo announced plans to return up to $1 billion to shareholders via share buybacks. 

Against a backdrop of China virus concerns and falls for rival miners, the shares retreated by just over 1% in late morning UK trade. 

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. Trade wars have recently added a further obstacle. 

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. The acquisition of Sirius would further diversify its commodity portfolio. 

For investors, a prospective dividend yield of over 3.5% and covered more than twice by earnings is reasonably attractive. Likewise, on the valuation front a forward price/earnings ratio (PE) of around 10 and below the three- and 10-year averages, does not look stretched. However, investors will be monitoring prospects for global trade and Chinese growth very closely.

Positives: 

• A basket of commodities helps even out prices rises and falls across the portfolio
• Targeting a reduction in debt
• A focus on shareholder returns

Negatives:

• China’s growth rate has hit a 29-year low – a key market for Anglo
• Political uncertainty and worker disruption in South Africa
• Operates several tailings dams that could cause severe damage and loss of life if they failed

The average rating of stock market analysts:

Strong hold