The Highlights and Headwinds in Anglo’s Portfolio

Low-cost South Africa Operations highlights Anglo American’s iron ore portfolio, while cost headwinds weigh on platinum gains and cost-plus pricing on Eskom Sales limits upside for coal

Daniel Rohr, CFA 7 January, 2011 | 10:18AM
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Anglo American's (AAL) platinum operations--conducted through its 80% ownership of Johannesburg-listed Anglo Platinum--are a source of great potential and great frustration. While it is the world's largest producer of platinum group metals, accounting for 40% of annual global output, Anglo Platinum is far from a reliable profit machine. In 2009, while $4.5 billion in sales made Anglo Platinum the largest segment by revenue, the business earned a meagre 1% operating margin, making it a laggard in Anglo's portfolio. While a weak platinum price had something to do with this, prices were high enough in 2009 for fellow South African platinum miner Impala (IMPUY) (the industry's second-largest producer) to turn in a 21% operating margin. The difference between Anglo and Impala, as for all commodity industries, comes down to cost: It's more expensive for Anglo more to dig the stuff out of the ground.

Anglo's leadership has made cost management a priority for the business and has followed through with some dramatic moves, slashing head count 20%, splitting large mine complexes into smaller, more nimble operations, and placing three higher-cost shafts on care and maintenance. Thus far, the results have been largely positive: Mine labour productivity in the first half of 2010 was up 11% from the year-ago period. Labour productivity is crucial for Anglo's platinum operations because labour (including contractors) accounts for roughly half of the business' total cash costs. Labor and contractor expenses typically account for one sixth to one third of cash costs at an open-pit copper mine, depending on extraction and processing methods.

Better labour productivity yielded an improvement in Anglo's cost profile. In local currency terms, first-half 2010 cash operating costs per platinum equivalent ounce were ZAR 11,493, up 7% from ZAR 10,775 in the year-ago period--not bad, considering significant inflationary forces (wages, electricity) and a decline in platinum head grade. Management has targeted a cash operating cost of ZAR 11,000 per ounce in nominal terms for both 2010 and 2011, with the long-term objective of moving the cost position of its platinum operations to the first and second quartiles of the industry cost curve. If achieved, this would represent a significant coup for management and major valuation driver for Anglo as a whole.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Anglo American PLC2,812.50 GBP0.00Rating

About Author

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