Anglo American PLC (LON: AAL): Well-positioned to capitalise on upcoming opportunities following the strong performance recovery in Q4 FY20 performance.

Anglo American PLC is FTSE 100 Mining Company with operations in Australia, Southern Africa, South America, and North America, and is headquartered in London, United Kingdom. The Company’s primary activities include mining, exploring, and processing of minerals and metals at various geographies globally. The portfolio of minerals and metals include thermal coal, manganese, nickel, iron, diamonds, platinum, and copper. It seeks to secure, develop, and operate a portfolio of high quality and long-life resource assets that offers an attractive long-term value creation potential through sustainable cash flow and returns. It focuses on innovative practices and technologies to offer a high-quality range of products. It 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. It employs over 90,000 employees globally. Moreover, it is committed to being carbon neutral by 2040 across all operations.

On 25 February 2021, AAL expects to release its FY20 results.

  (Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

Anglo American PLC benefits from a range of high margin, high return, and fast payback options within the existing portfolio, which is complemented by industry-leading explorations projects and backed by the best technical experts in the industry. It has delivered cash returns of around US$ 5 billion in the form of dividends & buybacks since 2017. Further, it has been keeping net debt to EBITDA lower than 1.5x and providing EBITDA margin of 45% to 50% consistently over the years. It has been delivering resiliently in volatile times with decent financial and unchanged production guidance, which underpins that it is well-positioned for the future. It has many value-accretive projects in the pipeline with low risk and higher production. Therefore, it is well-positioned to take benefits from growth trends across the energy and industrial markets. Further, it is leveraging to optimise the operational structure to achieve sustainable growth in the future, and it aims to be carbon neutral by 2040 across all operations.

Regarding the risk factors, the Company’s performance is subject to various risks, such as volatility in prices of metallurgical coal, iron ore, and copper. Moreover, the subdued outlook for global economic growth coupled with geopolitical issues, can affect foreign exchange rates.  Also, the ongoing COVID-19 disruption can delay commissioning and approval of certain projects. The other risk includes increasing environmental regulations, and failure to achieve operational targets due to the supply chain issues. 

Industry Outlook Dynamics

According to experts, the market size for the Global Strategic Mineral Materials market is projected to grow at a compounded annual growth rate of 6.4 per cent from 2018 to 2026. There are several global trends which influence the mining industry, such as transition towards lower emission transport, changing demographics, regulatory expectations, changing the physical environment of mining, among others. Adjacently, the market size for the copper industry will be around US$222 billion by 2026. The demand for copper is consistently growing, primarily driven by urbanization (includes demand for power generation and transmission), economic development (includes development related to infrastructure, transport, and construction), and the newly rising demand for electric vehicles and renewable energy.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Anglo American Plc.

Q4 FY20 Production Update (for the quarter ended 31 December 2020, as on 28 January 2021)

(Source: Company Website)

• The Company delivered a strong performance recovery in the second half of 2020 and has continued through the fourth quarter of 2020.
• Copper production surged by 6% YoY while Collahuasi delivered record production for the 12 month period.
• During the quarter, the Iron ore production at Minas-Rio in Brazil delivered a record of 6.5 million tonnes, which was increased by 5% year-on-year.
• In November 2020, PGMs' ACP Phase A unit was rebuilt and restarted. Further, it is performing strongly to commence processing the build-up of the inventor.
• In the fourth quarter of 2020, the Company saw positive trends in demand for rough diamonds, driven by an encouraging holiday selling season for diamond jewellery.

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 30 July 2020)

(Source: Company Website)

• In the first half of 2020, the revenue decreased by 16% year-on-year, driven by lower production.
• The Company delivered a strong performance at Minas-Rio iron ore operation, with decent results reported from the Brazilian iron ore and Chilean copper operations.
• Led by the impact of the Covid-19 pandemic on production across the assets in Southern Africa and the decrease in the price for the Group's basket of products, the Company’s Mining EBITDA margin stood lower at 38%.
• Net debt increased by US$3.0 billion (as compared with FY19) to $7.6 billion in H1 FY20.
• Growth capital expenditure for H1 FY20 rose to US$0.6 billion as compared with the corresponding period of the last year (30 June 2019: $0.1 billion).
• The Board has proposed a dividend per share of US$0.28 for the first half of 2020 (30 June 2019: US$0.62), which is equivalent to US$0.3 billion (30 June 2019: $0.8 billion).
• At the end of June 2020, operations were accelerated to around 90% of production capacity.
• Palladium and platinum production decreased by 21% year-on-year to 531,600 ounces and by 25% year-on-year to 748,300 ounces, respectively.
• Due to the impact of Covid-19 lockdowns on production at the southern African operations, De Beers’ rough diamond production reduced by 27% year-on-year to 11.3 million carats (30 June 2019: 15.6 million carats).
• Overall, copper production declined by 2% year-on-year to 313,900 tonnes (30 June 2019: 320,200 tonnes), with a decrease of 18% in production at Los Bronces and an increase of 27% in production from Collahuasi.
• Nickel’s production climbed by 11% year-on-year to 21,700 tonnes (30 June 2019: 19,600 tonnes).
• Minas-Rio production surged by 17% year-on-year to 12.6 Mt in H1 FY20, reflecting a continued robust performance.

Financial Ratios

Share Price Performance Analysis

On 3 February 2021, at the time of writing (before the market close, at 9:20 AM GMT), Anglo American PLC’s shares were trading at GBX 2,397.50, down by 1.29% against the previous day closing price. Stock 52 week High and Low were GBX 2,846.50 and GBX 1,018.20, respectively.

From the technical standpoint, 100-day SMA (2,218.70), 100-day EMA (2,295.80) and 14-day RSI (38.54) reflecting an upward trend in the stock.

Over the past two years, AAL’s stock has yielded a positive return of ~24.74%, while FTSE 100 index and FTSE All Share Industrial Metals index has given a negative return of ~6.65% and a positive return of ~7.01%, respectively.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook Scenario

It is planning to increase the production from old and new operations in the coming future. Moreover, the Company appears to be resilient with operating and capital expenditure cut in 2020. Adjacently, integration activities of Sirius Minerals PLC have been progressing well, and it is expected to incur US$300 million capital expenditure for FY20 to develop a major new polyhalite project in the UK. Similarly, the production guidance for diamond revised to 32-34 million carats for FY21. Subsequently, the Company witnessed a recovery in the seventh sales cycle of the year in rough diamond demand. However, the recovery is at an early stage, and the demand might take some time to reach back to pre-Covid-19 levels.

(Source: Presentation, Company Website)

Adjacently, the production guidance for copper remained intact at 640,000-678,000 tonnes for FY21, which is dependent on water availability and impact of the pandemic. Also, the production guidance for Platinum Group Metals (PGMs) remained unchanged at 4.2-4.6 million ounces of palladium for FY21.

In the longer-term, the Company is well-positioned to take benefits from growth trends across the energy and industrial markets. Also, the completion of the UK Woodsmith polyhalite project should generate synergy in future. Presently, most of the Company’s sites across the world are operating with appropriate safety measures. 

 (Source: Presentation, Company Website)

Considering the strong performance recovery, resilient business model, positive demand for rough diamonds, decent operating and financial performance, robust cash generation capabilities, improved profitability margins, consistent dividend payout trajectory from the last 10 years, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Anglo American at the current price of GBX 2,397.50 (as on 3 February 2021, before the market close at 9:20 AM GMT), with lower-double digit upside potential based on 4.15x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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