Anglo American £20.20 Questor says: Buy
In a mining sector that has more than its fair share of troubles, Anglo American has more problems than most Cynthia Carroll, its chief executive, resigned in October after yet another cost overrun at its Brazilian flagship growth project Minas-Rio. This was the fourth increase in expected costs for the iron ore project since it was bought in 2008.
The miner is also very exposed to the South African platinum industry, which has seen strikes and protests at major mines, sparked by a violent protest at one of Lonmin’s operations.
Analysts have also calculated that Anglo’s return on equity a key measure of profitability fell to 8pc in the first half of 2012. This was the miner’s worst investment return since the Great Depression. A review of Minas-Rio and platinum is expect shortly.
The shares have suffered from poor investment priorities and operational disappointments. Ms Carroll came under significant fire from her critics during her six years in the chief executive seat, but she managed to improve the miner’s safety record significantly, which has helped relationships with the South African government.
Also, the expansion out of its South African base into South America, Australia and Asia has reduced the perceived “South Africa risk” that surrounds the company. It has diversified into iron ore, copper and coal and last year took overall control of diamond giant De Beers after it purchased the Oppenheimer family stake. A recovery in diamond prices, which is likely over the next couple of years, should see value unlocked in this business unit.
Two major catalysts for share-price performance are looming. A final update on the expected cost implications at Minas-Rio could provide relief, but the most important event will be its platinum business review.
The key here is for the company to be able to move the whole operation lower down the cost curve - ie Anglo needs to produce platinum cheaper than its competitors because platinum prices are expected to track to the cost of production at the more expensive players.
This could involve an exit form its high cost operations though a sale or closure. It may even sell a smelter. However, all this will have to get through the machinations of South Africa’s government, as Anglo is the country’s largest private sector employer.
One broker recently said that it expected that Anglo would be acquired within two years of the new chief executive’s appointment. This did not depend on the success of the platinum review - which is expected imminently. He argued that a successful outcome at Anglo American Platinum would mean the group was attractive to a predator (Glencore?) or because its failure would force a break up of the group.
The shares are now trading on a 2013 earnings multiple of 12.4 and yielding 2.6pc. Although there are many challenges ahead, the company is likely to announce major changes over the next few months that could unlock significant value over the long term.
Questor upgrades the shares to buy from hold in anticipation of this news.