Anglo American: Balanced Approach To Earnings Diversification (OTCMKTS:NGLOY)

Following our Rio Tinto Q4 production results, today we are looking at Anglo American plc (OTCQX:NGLOY; OTCQX:AAUKF). Our readers know that we intensively cover the mining sector, and last week, the company released its commodity output. All in all, Anglo American Q4-2022 production report was in line with our expectations – in detail, copper volume was slightly above our internal estimates given the solid performance from Quellaveco ramp-up; however, this positive development was partially offset by weaker output in PGM and met coal production. Our buy rating target was supported by:

1. A positive view from higher selling prices versus Wall Street estimates,
2. A higher diversified EBITDA mix versus BHP and Rio Tinto (as a reminder both companies have 3/4 of the total EBITDA skewed versus iron ore productions),
3. Still related to point 2), Anglo has the ramp-up copper mining power thanks to Quellaveco’s new facility,
4. A unique exposure in the PGM sector, following EU and US repercussions on Russia’s invasion of Ukraine. This is supported by higher EV penetration.

With no surprise, we positively welcome Anglo American’s stock price development, the company is up by 36% (including its tasty dividend per share payment).

Q4 Production Results

As already mentioned, the Q4 production result was positive. Looking at the company’s press release, the CEO announced that Anglo’s “production increased by 10% in the fourth quarter compared to the same period in 2021“. Regarding the specific commodity output, this was supported by copper volumes which were up by more than 50% thanks to the Quellaveco copper mine in Peru, while copper production from Chilean operations was flat on a yearly basis. Both diamond and steelmaking coal production increased by 6%, respectively. These results were partially offset by higher scheduled maintenance requirements and planned end Grasstree production. Nickel and platinum group metals decreased by 4% and 10% due to planned annual maintenance and lower grades at the Mogalakwena mining facility. Aside from the volumes, it is important to report that Anglo American will reach a 100% renewable electricity supply in Australia by 2025.

Regarding a few specific risks, we should flag Anglo American exposure in South Africa which represent approximately 25% of the total company’s capacity output. In the country, both the state rail provider Transnet and the electricity provider Eskom have had a few interruptions. Although Fiscal Year 2023 was left guidance, this could be an Anglo American headwind to iron ore and PGM production. In addition, the company also emphasized that there are continuous challenges in the Los Bronces mining facility due to water availability.

Conclusion

The next company’s catalyst is the full results presentation on the 23rd of February. Our internal team expects that the company will maintain its shareholder remuneration based on a 40% payout ratio. In detail, we forecast an H2 dividend per share of 0.67 USD; however, we should recall that Anglo American usually has supplemented its payout with special dividends and opportunistic share repurchases. However, given the current macroeconomic challenges and uncertainty on Woodsmith’s higher CAPEX requirements, Anglo American top management could take a more cautious approach to additional shareholders’ remuneration. The company has some financial leverage (0.6x ND/EBITDA), but in our numbers, we estimate a potential impairment for a Woodsmith mining facility and a negative financial one-off for a rehab provision which will hit the company’s EBITDA for $300 million.

Is Anglo Stock A Buy? Valuation

Given the 2023 guidance (Fig below), we decided to leave unchanged our target price of £35 per share, confirming our buy rating. This is supported by a rolling forward valuation on 2023 EV/EBITDA of 5x. Here at the Lab, we positively welcome Anglo copper volumes; however, we do believe that exposure to diamonds and PGM is largely priced in with the current stock price. Aside from the country risk in EM, additional company risks are FX and commodity price development.

The latest coverage in our mining universe are:

1. BHP Is Fairly Valued
2. Rio Tinto: Q4 Production Report Analysis

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.