Our opinion on the current state of AGL

With Anglo American (AGL), the risk normally associated with commodity stocks is mitigated in two ways. Firstly, the company has diversity of different minerals which reduces the impact of any one mineral entering a bear trend. Secondly, the traditional mechanism to avoid risk is to have a very strong balance sheet with plenty of headroom. That way, if things turn bad, you can ride out the storm. Anglo has such a balance sheet. Anglo describes itself as a globally diversified mining company with a portfolio of world-class mining operations and undeveloped resources. It is true that commodity prices as a group tend to move in trends, and since the beginning of 2016, that trend has been steadily upward until the corona virus caused markets to fall into a new downward trend in March 2020. The upward trend has now resumed, with a strong recovery already taking place. An Anglo project is Quellaveco in Peru which is a massive copper mine in which Anglo owns 60% of. It will have a very rapid payback period now that it has begun producing. It is costing $5,6bn to build which should be recovered in about 4 years - and then the mine has a life of 30 years. We believe that the boom in commodity prices is continuing, and that COVID-19 is substantially behind us - commodity prices will be driven on by the economic expansion which began in America and spread to Europe and the East. Of course, the conflict in Ukraine is pushing commodity prices up, especially precious metals, because of the heavy sanctions on Russia. So, if you are looking for an investment which is likely to be more exciting than buying one of the big banks or property REITs, and which will benefit directly from the growth in the world economy, you could do worse than to consider Anglo American. One of the factors holding the company back has been the poor availability of Transnet’s rail service, especially at Kumba. The company plans to get 100% of its energy needs from renewables in South Africa by 2023. In its results for the six months to 30th June 2023 the company reported production up 10% and group basket prices down 19%. Revenue was down 13% and headline earnings per share (HEPS) was down 55,3%. The PGM basket price was down 29%. In a production report for the 3 months to 30th September 2023 the company reported copper production up 42%, PGM production unchanged, iron ore production down 4%, nickel production down 7%, rough diamond production down 23% and steel making coal production down 21%. The company said, "A 42% increase in copper production as Quellaveco's contribution ramps up was offset primarily by De Beers, as Venetia transitions to underground operations, and by performance at Moranbah and the Grosvenor ramp-up at the underground Steelmaking Coal operations". Anglo’s share price went up six-fold in under three years and rose to R425 before the corona epidemic. It fell to R210 and then recovered to over R800 before the problems at Los Broncos. The current fall in the share price is a result of the drop in commodity prices. This was illustrated in the latest results from Kumba where there are production problems and lower grades from the Chile copper production which resulted in a flat production report for the third quarter to 30th September 2022. It is clear that the company is being badly impacted by both the increased load shedding and problems with the South African rail service. Technically, the share appears to have completed the head-and-shoulders formation and broken down through the neckline at R525. The stage is now set for further falls.