Anglo American Plc (AAL) is a London, United Kingdom-headquartered international mining group, with operations in North and South America, Southern Africa, and Australia. Its principal operations include mining, exploring and processing of metal and minerals globally, with a portfolio including metals such as copper, platinum, diamonds, iron, nickel, manganese and thermal coal. The group was established by entrepreneur Ernest Oppenheimer in 1917 in Johannesburg, South Africa, but the group has expanded in many industries and expanded beyond its roots in South Africa. The group owns one of the largest and most attractive undeveloped copper deposits in the world, along with other world-class portfolios of mining and processing operations of other assets and undeveloped resources. The company is a constituent of the FTSE 100 index of the London Stock Exchange and has a secondary listing on the Johannesburg Stock Exchange.

The company seeks to secure, develop and operate a portfolio of high quality and long-life resource assets that offer an attractive long-term value creation potential through sustainable cash flow and returns. Investments are made across different products, end markets and geographies, which helps the group in balancing and optimising the concentration of its investments and create a measured risk profile to support strong returns. The group focuses on innovative practices and technologies to offer a high-quality range of products, often which are developed by the company itself. The group also undertakes exploration projects, which is divided into brownfield exploration to identify resources close to existing operations and greenfield exploration to find entirely new resources.

Key Statistics


Management

Stuart Chambers is the Chairman of the group, he was appointed in November 2017. Mark Cutifani is the Chief Executive Officer of the group since April 2013. The CEO is supported by Stephen Pearce, who is the Finance Director.

Segments


(Source: Company Filings, for FY 2018)

The operations of the group are differentiated in six core operating segments, namely De Beers, Copper, Platinum Group Metals, Iron Ore, Coal, and Nickel and Manganese. De Beers segmentincludes rough and polished diamonds under the De Beers Group, which is produced around a third of the rough diamonds of the world and has a global leadership position in diamonds. The Copper segmentboasts a world class asset position of the group in copper, underlined by Quellaveco project in the south of Peru, polymetallic Sakatti deposit in Finland, Collahuasi mine and Los Bronces Mine. The Platinum Group Metals division is a leading producer of platinum group metals, with flagship platinum mine, Mogalakwena, and consists of ownership of the group in Anglo American Platinum Limited. Iron Ore segment operations provide customers with high iron content ore and include mines and ownership in several countries and companies. The Coal division includes metallurgical coal and thermal coal, with thermal coal assets in South Africa and Colombia, and metallurgical coal assets in Australia. The Nickel and manganese segmentinclude nickel, manganese ore and alloys, with manganese assets in South Africa and Australia and nickel assets in Brazil.

Top Shareholders


 (Source: Thomson Reuters)

Operational Performance (H1 FY 2019)


(Source: Company Filings)

Due to strong performance at Metallurgical Coal and successful ramp-up at Minas-Rio, production was up by 2% in the quarter of the year butdeclined by 2% on a copper equivalent basis in the first half. Reflecting a slowdown in demand in the market, De Beers’ diamond production decreased by 14% to 7.7 million carats in the quarter, while itdecreased by 11% to 15.6 million carats (30 June 2018: 17.5 million carats) in the first half 2019. Due to strong mine and plant performance, copper production increased by 2% to 320,200 tonnes (30 June 2018: 312,900 tonnes) in H1 2019, and it increased by 1% to 159,100 tonnes in the second quarter. In the first half, total palladium output decreased by 4% to 673,800 ounces and total platinum production (metal in concentrate) decreased by 1% to 992,200 ounces, while palladium decreased by 1% to 347,200 ounces and platinum production increased by 3% to 520,300 ounces in Q2 2019.

Financial Highlights (H1 FY 2019, in $m)


(Source: Company Filings)

Revenue during the period rose by 8% over the year to $14,772 million,up from $13,698 million in H1 2018, as stronger prices for certain products more than offset price weaknesses elsewhere, reflecting benefits from diversification. As the company was able to control its expenses, operating costs remained largely flat at $11.4 billion against $11.2 billion in H1 2018, while operating profit rose to $3.34 billion versus $2.43 billion in the prior year. Group’s underlying EBITDA rose by 19% to $5.5 billion (30 June 2018: $4.6 billion), while profit before net finance costs and tax rose to $3.59 billion from $2.755 billion in H1 2018. Underlying profit before net finance costs and tax also rose to $3.83 billion against $2.95 billion in the first half of 2018. Reflecting strong prices, particularly for the PGMs basket and iron ore, group’s Mining EBITDA margin increased to 46% (30 June 2018: 41%). Average market prices contributed $0.7 billion of improvement to underlying EBITDA as the average price of a basket of commodities and products increased by 2%, while the weaker South African rand boosted underlying EBITDA by $0.5 billion. Despite a decent cost performance, lower volumes in the period drove down underlying EBITDA by $0.3 billion, while the impact of inflation on costs reduced underlying EBITDA by $0.2 billion, as weighted average CPI for the period was 3%. Profit before tax was $3.38 billion, against $2.44 billion in H1 2018, while underlying profit before tax rose to $3.62 billion versus $2.76 billion H1 2018. Profit for the financial period rose by 52% to $2.5 billion (30 June 2018: $1.6 billion) and underlying profit for the period was $2.65 billion against $1.95 billion in the first half of 2018. Though an increase in the profit attributable to non-controlling interests reduced the group’s underlying earnings attributable to shareholders but a 19% increase in the EBITDA drove it to $2.0 billion (30 June 2018: $1.6 billion), while total profit attributable to equity shareholders rose by 46% to $1.88 billion. Underlying earnings per share rose by 28% to $1.58, helping the company to announce a 27% increase in the dividend to $0.62. Net debt was 0.3x underlying EBITDA as net debt increased to $3.4 billion, and $1.3 billion of attributable free cash flow was reported during the period. Attributable return on capital employed increased to 22% (30 June 2018: 19%).

Financial Ratios

 
(Source: Thomson Reuters)

Ratios Commentary

Over the years, the profitability margins have remained largely stable or shown a slight decline, but they have remained constantly above the industry median. This reflects the benefits of technological prowess and diversification, despite being a large company. The liquidity position is also better than the industry’s and recorded an increase over the last year. Over the past couple of years, the leverage position has not changed much and is in line with the industry median. The asset turnover ratio has been improving gradually over the years, and the difference over the industry median is declining.

Valuation Methodology
Method 1: Price/Earnings Multiple Approach (NTM)


To compare AAL with its peers, Price/Earnings multiple has been used. The peers are Kaz Minerals PLC(NTM Price/Earnings was 4.68), Vale SA(NTM Price/Earnings was 6.01), Rio Tinto PLC (NTM Price/Earnings was 8.15),Glencore PLC(NTM Price/Earnings was 9.55) andBHP Group PLC(NTM Price/Earnings was 10.01). The mean of Price/Earnings (NTM) of the company’s peers was 7.68x (approx.).

Method 2: EV/ Sales Multiple Approach (NTM) 

To compare AAL with its peers, EV/ Sales multiple has been used. The peers are Glencore PLC (NTM EV/Sales was 0.33), Norsk Hydro ASA (NTM EV/Sales was 0.50), South32 Ltd (NTM EV/Sales was 1.18),Vale SA(NTM EV/Sales was 1.77), and Antofagasta PLC(NTM EV/Sales was 2.56). The mean of EV/Sales (NTM) of the company’s peers was 1.27x (approx.).

Share Price Commentary

 
Daily Chart for the last year as at 02-September-19, before the market closed (Source: Thomson Reuters)

On 02 September 2019, at the time of writing the report (at 10:42 am GMT, before the market closed), AAL was trading at GBX 1,780, higher by 0.32 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 2,294.00/GBX 1,433.64. The company’s stock beta was 1.62, reflecting more volatility as compared to the benchmark index. The outstanding market capitalisation was around £24.60 billion, with a dividend yield of 5.25 per cent.

Risks Assessment and Growth Prospects

As the country operates in a diverse range of countries, uncertainty and adverse changes to mining industry regulation, legislation, or any other political changes can result in a lack of confidence in making investment decisions, which can adversely affect the operations or performance of the group. The company can face a significant impact on the financials and affect the business assumptions as prices of various commodities the company markets can be subject to significant adverse fluctuations, over which the group does not have any control. An oversupply of commodities into the market, low growth rates in developed economies and continued slowdown in growth in China and other emerging markets can lead to sustained low product prices and/or volatility, as demand for products can be impacted. In the short-term, the company expects to face challenges from macroeconomic and geopolitical uncertainties, not least from the continuing global trade tensions, which has impacted global growth. Technological developments have led to the artificial production of higher quality gem synthetics, which can have a potential loss of rough diamond sales, resulting in a negative impact on revenue.

Production Forecasted


(Source: Company Filings)

The Operating Model implementation by the group is continuing to deliver improvements, as the group focuses on efficiency and productivity, which can be seen in the improved margins of the group. The group reported a 16 points rise in Mining EBITDA margin to 46%, as productivity per employee more than doubled since 2012, driven by efficiency measures. Moreover, the group has a clear asset-led strategy, and relative to 2017, the group is targeting annual underlying EBITDA run rate improvement of $3-4 billion by 2022. The company benefits from a range of high margin, high return and fast payback options within its existing portfolio, which is complemented by industry-leading explorations projects and are backed by the best technical experts in the industry. The company expects to report $0.4 billion of cost and volume benefits to underlying EBITDA in 2019, and capital expenditure is expected to be in line with guidance for the year of $3.8-4.1 billion as the capital expenditure in the second half of the year is expected to be $2.4-2.7 billion.

Conclusion

In the last three years, the group has reported a commendable growth in revenue, with a CAGR of 14%, supported by an impressive expansion seen in the global economy. Over the last two years, income before tax grew with a CAGR of 18.29%, while income after tax rose with a CAGR of 18.62%. Moreover, net income grew by a CAGR of 15.36%, which was higher than the growth in revenue, which indicated that the company controlled its cost as well.
 
Based on the decent prospects, and supported by valuation undertaken using the above two methods, we have given a “BUY” recommendation at the closing  price of GBX 1,774.2 (as on 30 August 2019) with low double-digit upside potential based on 7.68x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.) and 1.27x NTM EV/Sales(approx.) on FY19E Sales (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on 02-September-19).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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