Our opinion on the current state of ANGLO(AGL)

Anglo American (AGL) is a globally diversified mining company that has effectively mitigated the typical risks associated with commodity stocks through strategic diversity in its mineral portfolio and maintaining a robust balance sheet. This diversification helps cushion the impact should any single mineral enter a bear trend, while a strong balance sheet provides the resilience needed to withstand economic downturns.

Historically, commodity prices have shown a tendency to follow distinct trends. Starting from 2016, there was a steady upward trajectory until the COVID-19 pandemic triggered a downturn in March 2020. However, a recovery is evident, and the upward trend has resumed, fueled partly by economic expansions starting in America and spreading to Europe and Asia. Additionally, the conflict in Ukraine has driven up prices, particularly for precious metals, due to heavy sanctions on Russia.

A key project for Anglo American is the Quellaveco mine in Peru, a massive copper venture where Anglo owns a 60% stake. With a construction cost of $5.6 billion, the mine is expected to achieve a rapid payback within approximately four years, thanks to its production potential and a projected 30-year operational lifespan.

Despite these positive aspects, Anglo American has faced challenges, such as unreliable rail services from Transnet, particularly impacting its Kumba operations. The company has ambitious plans to meet 100% of its energy needs from renewable sources in South Africa by 2023. However, the share price has experienced significant volatility; it surged six-fold in under three years pre-pandemic, fell during the pandemic, and has since recovered impressively, although recent commodity price drops have affected it.

For the year ending 31st December 2023, Anglo reported a 13% decrease in revenue and a dramatic 94% drop in earnings per share (EPS) in US dollars. Operational highlights included the full ramp-up of Quellaveco, producing 319,000 tonnes of copper at a cost of 111 cents per pound, and a strategic reduction plan aiming to cut annual costs by approximately $1 billion and capital expenditures by about $1.6 billion over the next three years. Despite these measures, a significant revenue impact from cyclical lows in PGMs and diamonds contributed to a 31% decline in underlying EBITDA.

Recently, Anglo's stock has shown technical signs of further declines after completing a head-and-shoulders pattern and breaking down through the neckline at R525. However, following an acquisition offer from BHP on 13th May 2024, which proposed exchanging 0.8132 BHP shares for each Anglo share, the stock price rallied from 47926c to 63480c. Anglo rejected this second offer from BHP, signaling potential for an even more favorable proposal, possibly from competitors like Rio Tinto or Glencore.

Given these dynamics, Anglo American presents a potentially exciting but volatile investment opportunity, directly benefiting from global economic growth and the strategic management of its diverse mineral portfolio. The future could see significant developments, especially with the ongoing interest from major players in the mining sector.