ii view: rising metal prices help Anglo American shine

A tough first half has been followed by a better second half. Buy, sell or hold?

Full-year results to 31 December 2020

Chief executive Mark Cutifani said:

"In 2020 we saw much of the world tested to its limits by Covid-19. I am immensely proud of how our team of more than 95,000 people across Anglo American pulled together to do what's right for each other, for our many stakeholders across society and the business.

"Our balanced investment programme is driving material business improvement, while also delivering margin-enhancing and sector leading volume growth of 20-25% over the next three to five years. 

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“Looking further out, we benefit from a sequence of high returning growth options, mainly in copper, PGMs, and now also crop nutrients. Our business is increasingly positioned to supply those products that are fundamental to enabling a low carbon economy and catering to global consumer demand trends. Combined with our integrated approach to technology and sustainability - also helping us reach carbon neutrality across our operations by 2040 - we are well positioned to meet the expectations of our full breadth of stakeholders."

ii round-up:

Double-digit commodity price gains helped mining giant Anglo American (LSE:AAL) lift its final dividend by 53% to $0.72 (51p) per share despite suffering pandemic production related disruption. 

Price rises of 23% and 51% for key commodities iron ore and platinum group metals (PGM) helped counterbalance an 18% overall production decline in the first-half and a 10% retreat for the year as a whole. 

As such, adjusted group earnings fell by just 2% to $9.8 billion (£6.96 billion). The final dividend payment adds to a $0.28 previous interim dividend, giving a total payment for 2020 of one dollar per share. Above analyst expectations nearer to $0.90 per share. Although still down on the $1.09 paid over 2019.

Anglo shares gained by more than 4% in UK trading, leaving them up by more than 150% since the March pandemic lows. Rhodium and palladium, both used to reduce exhaust emissions in catalytic converters and sat within the PGM basket, rose by 179% and 46% respectively compared to 2019. 

Central Bank action to print money during the pandemic is also considered to have helped fuel demand for finite metals and commodities. Shares for Glencore (LSE:GLEN) and Antofagasta (LSE:ANTO) are also up by more than 150% since late March. 

Both Anglo’s Minas-Rio iron ore operation in Brazil and the Collahuasi copper joint operation in Chile helped counterbalance Covid-19 lockdowns across southern Africa in the first half, and the hits to production for PGMs, De Beers diamonds and thermal coal. 

The net impact of higher costs and lost volumes made for a total reduction on adjusted earnings of $1.3 billion. Cost saving initiatives at De Beers, copper and thermal coal and higher volumes at Minas-Rio and Collahuasi were more than offset by operational issues at PGMs and metallurgical coal.

More broadly, and given an increased focus on environmental issues, management flagged good progress regarding the proposed exit of its thermal coal operations in South Africa. 

According to brokers, Anglo also gave a comprehensive overview of its pipeline projects (both approved and unapproved) that will drive a 2018-2025 volume growth of 25%, giving better detail and understanding for spending budgets going forward. 

ii view:

The mining industry is tough and often difficult for managements to navigate. Exploration success, operational issues, staff difficulties and the weather can all feed in, while 2020 added a global pandemic to the list. Along with disrupting production and raising operational costs, it also reduced demand for such items as aircraft and cars as nations came to a near standstill.

For Anglo specifically, management’s push to improve productivity and increase its safety record 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. While two people sadly lost their lives over 2020, fatal incidents have been reduced by 87% since 2013. 

For investors, ongoing uncertainty regarding the pandemic cannot be overlooked. The nature of mining and its impact on the environment also sit uncomfortably with some investors. That said, the production of materials which facilitate modern day human life and economies remains important. Its diversity of commodities which include nickel, copper, iron ore and diamonds via its major shareholding in De Beers contrasts with the focus of others such as precious metal miners. A historic dividend yield of over 2% is also not to be dismissed in a era of ultra-low interest rates. For now, and with its first copper production from Quellaveco, Peru due in 2022, long term investor support appears to remain firm. 

Positives: 

• A basket of commodities helps even out prices rises & falls across the portfolio
• Group interests now include crop nutrients  

Negatives:

• Overall production fell by 10% on 2019
• Net debt rose by 20% to $5.57 billion

The average rating of stock market analysts:

Buy