Anglo American Posts Mixed Results

While diamond production increasedfor the quarter due to higher grades in South Africa, low first-quarter demand and prices led the company cut its production forecast for 2015

Daniel Rohr, CFA 24 April, 2015 | 12:49PM
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Anglo American (AAL) reported mixed production results for first-quarter 2015. Production increased for diamonds, iron ore, thermal coal, and platinum, though volumes fell for metallurgical coal, copper, and nickel. While diamond production increased 2% to 7.7 million carats for the quarter due to higher grades at Venetia in South Africa, low first-quarter demand and prices led the company cut its production forecast for 2015 from 32 million-34 million carats to 30 million-32 million.

We still think De Beers remains a bright spot for Anglo in the long run. Iron ore, coal, and copper have historically accounted for the lion’s share of profits. While those commodities are hurt by China’s slowdown, diamonds benefit as emerging-market countries ramp up demand for late-stage commodities. Diamonds made up nearly a quarter of EBITDA in 2014, and we believe they will continue to play a key part in profits. We maintain our £9.50 fair value estimate and no-moat rating.

As China rebalances away from infrastructure and construction-led growth, long-lagging Anglo will find itself better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds which make up about 40% of revenue, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.

Diamonds benefit as emerging-market countries ramp up demand

Anglo's huge platinum business should benefit as rising household incomes bolster Chinese demand for automobiles and jewellery, categories that collectively account for 84% of platinum and palladium use in China. However, persistent problems related to labour, geology, and electricity in South Africa, which have weighed on profits in recent years, threaten to limit the upside.

Planned mine closures and restructurings promise material efficiencies if fully implemented. But delivering will be no mean feat given labour and government opposition. Our expectations are accordingly modest. An 85% stake in De Beers makes Anglo the world's largest diamond miner. As with platinum and palladium, there's big upside to Chinese diamond demand, which now stands at 10% of the global total.

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Securities Mentioned in Article

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

About Author

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

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