Anglo Restarts Dividend as Profits Double

Anglo American has seen profits double thanks to strong iron ore and coal earnings and the miner is paying down debt and restarting its dividend payment

Mathew Hodge 9 August, 2017 | 9:51AM
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Anglo American (AAL) saw a profit of $1.87 billion in the first half of 2017, which was more than double last year’s. The increase was due to higher prices, with the impact of currency and cost inflation broadly offset by productivity improvements and cost savings.

The balance sheet has meaningfully improved, allowing dividends to restart

Iron ore, manganese and coal units saw pre-tax earnings nearly triple to $2.5 billion. This was largely due to increased prices for iron ore and metallurgical coal. Copper earnings grew nearly 40% to $600 million also due to price, while diamonds, platinum and nickel earnings were broadly flat.

The balance sheet has meaningfully improved with net debt down to $6.2 billion. Anglo intends to continue to pay down debt while commodity prices remain elevated, which we think is sensible.

The improved result allowed dividends to restart, with Anglo declaring a $0.48 per share interim. We forecast full-year total dividends of $0.82 per share reflecting the policy to pay out 40% of underlying earnings. However, we caution the attractive yield is unlikely to be sustained. The bulk of profit is from the high-cost iron ore, coal and copper operations and lower commodity prices will expose the unsustainability of cash flows.

Morningstar Analysts Upgrade Anglo

Morningstar equity analysts have upgraded Anglo American shares, raising the fair value estimate to £4.60 per share from £4.30. The shares are currently worth £13.04, making them overvalued.

The increase primarily reflects an expected fall in operating costs for Anglo, given the current focus on efficiency and productivity. Despite the increase, we still think Anglo American is overvalued.

Current commodity prices are elevated because of robust global economic growth as well as the benefit from China’s stimulus in 2016. The effect of the stimulus should wane through the remainder of 2017 and we expect commodity prices to start to normalise later this year and into 2018.

We do not consider Anglo to have a competitive advantage over its peers and as such have assigned it a “no moat” rating; this reflects the lack of cost advantage. This is particularly true for the iron ore operations. We forecast iron ore to generate approximately one third of group operating profit in 2017, reflecting current elevated iron ore prices, but from 2019 expect this division to struggle to break even as prices normalise. Vale, Rio Tinto, BHP, and Fortescue collectively supply about 75% of the global market and have lower costs than Anglo.

We think it’s reasonable to expect Anglo American to remain relatively restrained in the near to medium term when it comes to capital expenditure. The company has continued to sell smaller, non-core assets. We view asset sales generally positively, but they are small relative to the overall group.

Production guidance for 2017 is largely unchanged, except for metallurgical coal where start-up issues at the Grosvenor mine mean Anglo expects to produce at the bottom of the 19 to 21 million tonne guidance range.


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Anglo American PLC2,377.00 GBX0.76Rating

About Author

Mathew Hodge  is Morningstar's director of equity research, Australia & New Zealand.

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