Our opinion on the current state of ANGLO(AGL)Anglo American (AGL) mitigates the typical risk associated with commodity stocks in two ways. Firstly, the company has a diverse portfolio of different minerals, reducing the impact of any one mineral entering a bear trend. Secondly, it maintains a very strong balance sheet with plenty of headroom, allowing it to ride out economic downturns. Anglo describes itself as a globally diversified mining company with a portfolio of world-class mining operations and undeveloped resources.
Commodity prices tend to move in trends, and since the beginning of 2016, the trend has been steadily upward until the coronavirus pandemic 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. One of Anglo's key projects is Quellaveco in Peru, a massive copper mine in which Anglo owns 60%. This project 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 four years, and 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 by the economic expansion that began in America and spread to Europe and the East. Additionally, the conflict in Ukraine is pushing commodity prices up, especially precious metals, due to heavy sanctions on Russia.
If you are looking for an investment that 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 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.
Anglo’s share price went up six-fold in under three years and rose to R425 before the coronavirus 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 also a result of the drop in commodity prices. It is clear that the company is being impacted by both the increased load shedding and problems with the South African rail service.
In its results for the year to 31st December 2023, the company reported revenue down 13% and earnings per share (EPS) down 94% in US dollars. The company said, "Quellaveco fully ramped up and produced 319,000 tonnes of copper at a unit cost of 111 c/lb. On track to reduce annual costs by c.$1 billion and capex by c.$1.6 billion over 2024–2026. Underlying EBITDA of $10.0 billion, a 31% decrease; 2% volume increase and unit costs held to +4% despite high inflation, more than offset by $5.5 billion revenue impact of PGMs and diamonds at cyclical lows." The company has debt of $10.6bn and is involved in a complete review of all its assets.
Technically, the share appears to have completed a head-and-shoulders formation and broken down through the neckline at R525, setting the stage for further falls. On 11th December 2023, Business Day reported that Anglo had announced capital expenditure cuts of R1.8bn, causing the share price to drop by 13.3%. We recommended waiting for the share to break up through its long-term downward trendline (connecting the peak in January 2023 with that of December 2023). That happened on 2nd April 2024 at a price of 47926c. Since then, the share has risen to 63480c, mainly because of an offer first announced on 13th May 2024 from BHP to buy Anglo after unbundling Kumba and Amplats.
In terms of the third iteration of the offer, Anglo shareholders would get 0.8860 BHP shares for every share of Anglo that they held, which would result in Anglo shareholders owning 17.8% of BHP. Anglo announced that it had rejected this third BHP offer but opened the door for negotiations. On Wednesday, 29th May 2024, BHP withdrew its offer. Our view is that there may be other offers, perhaps from Rio Tinto or Glencore.