Money manager Sanlam Private Wealth has backed mining major Anglo American to come good after a torrid few months in which the group has cut jobs and slashed costs in response to weak commodity prices.
Sanlam Investments said it was particularly upbeat on Anglo’s copper assets.
Investment analyst at Sanlam Private Wealth Christiaan Bothma said while it had a bias towards BHP and Glencore over Anglo in its clients’ portfolios, it had lately become positive on the outlook for Anglo, with the “risk-reward ratio becoming more favourable”.
“What excites us about the investment case is that we still see a robust medium-term up cycle for PGMs [platinum group metals], while the prospects for copper just keep getting brighter. Together, these two segments constitute nearly half of Anglo’s normalised profits and the average broker valuation (about a quarter each),” Bothma said.
“Copper is still the commodity that excites us the most in the Anglo portfolio. Demand from the energy transition is gaining momentum while mine supply is particularly constrained as grades decline in ageing ore bodies.”
Equity analysts at investment banking group Goldman Sachs earlier this year took a neutral stance over Anglo. Goldman expects a higher drawdown of debt for Anglo in 2024, leading to higher net interest than consensus.
The investment banking firm also expects Anglo to record negative cash generation after debt servicing and assumes lower capex in 2024 than consensus, “as we expect further deferrals of non-essential spend”.
Low commodity prices were the most pronounced risk for mining houses, Bothma said.
“Should we see these prices come off meaningfully while PGM and diamond prices also remain weak, further downside in earnings and the Anglo share price are likely to follow. Other risks include further operational disappointments. However, we do feel that the likelihood of these has diminished significantly after the large downgrades in December.”
Anglo’s share price is up 20% over the past three months, staging a recovery after it plunged in December, when it announced a capital expenditure cut of $1.8bn between now and 2026 to soften the blow of weaker commodity prices.
Anglo has a diversified portfolio of minerals worldwide. It is the majority owner of Kumba Iron Ore, Anglo American Platinum (Amplats) and De Beers, which together contribute hugely to SA’s corporate tax base and mining royalties.
Like most miners, it is at the mercy of unpredictable commodity markets, a problem that has been compounded by a deterioration in SA’s rail network, which has forced Kumba to slash production and jobs.
Amplats in February initiated a section 189A process that is likely to result in the retrenchment of 3,700 employees across its platinum mining business as it seeks to reduce R5bn in costs.
This announcement was followed by that of Kumba, which said that 490 workers might lose their jobs, while it was also reviewing contracts with service providers as the iron ore producer sought to cut costs at least R2.5bn this financial year
Anglo’s year to end-December results took a pounding from a plunge in the prices of PGMs and weak demand in diamonds, which caused the two commodities to contribute to a $5.5bn drop in revenue in the year under review.
With weak demand for diamonds in the key markets of the US and China, it caused Anglo to write down $1.6bn in De Beers’ value. The mining house said it would also impair $500m for its Barro Alto nickel mine in Brazil.
The impact of poor performance in the PGM and diamonds businesses caused the group’s earnings before interest, taxes, depreciation and amortisation (ebitda) to tank $4.4bn.
Bothma said the biggest reason for Anglo’s relative underperformance is its commodity mix, which is geared largely towards PGMs and diamonds.
“While we agree that there were some operational hiccups that could have been avoided, most of the December downgrades came down to proactive asset management in response to either weak markets (diamonds and PGMs), poor performance from Transnet (Kumba) or temporary bad grades (at the Los Bronces copper mine),” Bothma said.
“Also, despite the downgrades, Anglo still has a strong portfolio of long-life, low-cost assets in commodities that will be needed for decades to come. The average asset in the group’s portfolio has a mine life of more than 30 years and is situated in the bottom half of its industry cost curve.”
Anglo is reviewing its assets in a process that might cause it to dispose of businesses that are not fit for purpose in an effort to protect shareholder value and right size the group for growth.
Updated: April 2024 17
The previous article incorrectly said Bothma worked for Sanlam Investments, instead of Sanlam Private Wealth
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