Anglo Profits Despite Weak Commodity Prices

Anglo's huge diamond and platinum businesses ought to fare comparably well as China rebalances to more consumption-oriented growth, and sets it apart from its peers

Daniel Rohr, CFA 17 February, 2014 | 2:34PM
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Despite weaker commodity prices, Anglo American (AAL) reported slightly improved operating results for 2013. Underlying operating profit rose to $6.6 billion from $6.3 billion, aided by a weaker South African rand, better production from two big copper mines and a full year of wholly consolidated De Beers.

Despite evidence of improving operational performance, we expect the next couple years to be challenging for Anglo from a cash-flow generation perspective. We expect prices for Anglo's two biggest earners in 2013, iron ore and copper, to decline through 2015. Weaker Chinese demand growth and resurgent supply are the common denominators to that view. We see cash from operations falling from 2013's $6.8 billion. Meanwhile, capital spending will consume $7.0 billion to $7.5 billion in 2014 - a record, as Anglo enters the stretch run on the long-delayed Minas-Rio iron ore project, and fade only slightly in 2015.

Longer-term, the cash generation picture brightens as Minas-Rio ramps, despite our expectation of lower iron ore prices, and capital spending falls. In terms of its portfolio mix, we continue to favour Anglo's long-term positioning relative to most peers. Specifically, Anglo's huge diamond and platinum businesses ought to fare comparably well as China rebalances to more consumption-oriented growth.

During the next several years, we believe the platinum and diamond businesses will drive an increasing share of total earnings growth. We expect these later-stage commodities to benefit from a shift toward consumption-led growth in China while earlier-stage commodities such as iron ore, metallurgical coal, and copper experience a marked slowdown in demand growth

Commodity price assumptions are the primary drivers of valuation of Anglo. Our fair value estimate of £16 per share incorporates the following key midcycle commodity price assumptions: copper at $2.79 per pound, platinum at $1,649 per ounce, thermal coal at $104 per ton, metallurgical coal at $179 per ton, and iron ore at $101 per ton.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Anglo American PLC2,677.50 GBX1.84Rating

About Author

Daniel Rohr, CFA  is a senior equity analyst at Morningstar.

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