ANFGF - Anglo American: Focusing On Improved Operational Performance In 2023

Summary

• Anglo American commissioned the Quellaveco copper mining project in Peru to boost production amid a lackluster performance in 2022.
• AAUKF’s commitment over the next decade has been to balance its investments to drive margin and improve volume growth by more than 35%.
• Anglo announced a lower dividend of $0.9 billion, down 57.14% (YoY) equal to $0.74 against $1.18 paid in 2021.
• Anglo is following in the footsteps of ICL Group in the mining of polyhalite fertilizer.

Anglo American (AAUKF) has declined 28.70% (YoY) and is currently trading 37.8% below the 52-week high of $55.61. The company built its momentum in 2022 with its focus on stabilizing operations and improving performance. It also set its commitment to attaining a carbon-neutral mining environment by 2040.

Thesis

Anglo American commissioned the new Quellaveco copper mining project in Peru, a move expected to increase global copper production by up to 10%. The company expects that this operation will help it achieve a 25% growth in its value-addition strategy over the next decade. Additionally, I believe that the incorporation of Woodsmith's project extension will help deliver optimum returns for the company in the long run. However, the fertilizer to be manufactured from the mineral found in this project is yet to be commercially proven and will need further assessment.

Performance Overview

Anglo American reported an underlying EBITDA of $14.5 billion, representing a decline of 30% (YoY) for the year ended on December 31, 2022. The fall was due to an increase in costs and reduced product prices even as extreme weather continued to take a toll on production. In 2021, AAUKF had seen strong demand, high mineral prices, and a stable operational performance push the core profit to a record $20.6 billion.

Profit attributable to shareholders also fell 47.67% to $4.5 billion in FY 2022 from a high of $8.6 billion in 2021. Further, net debt grew 81.6% (YoY) to $6.9 billion (<0.5X underlying profit). The company increased its investment in value-addition that offset cash generation as opposed to growth-focused investment.

Value addition Investment

One main highlight captured in the Anglo American FY 2022 report was the commissioning of the Quellaveco copper mining project in Peru. The project was done on time and with the prescribed budget to ramp up a multi-decade copper operation. The Quellaveco mine seeks to increase Anglo American copper production by up to 10% with a value-addition growth of 25%.

AAUKF's commitment over the next decade has been to balance its investments to drive margin and improve volume growth by more than 35%. These investments include the Quellaveco mine that was commenced in the second half of 2022. The company's fourth quarter mineral production increased by 10% (YoY) boosted by operations at the Peruvian Quellaveco copper mine as well as the rough diamond produced from De Beers.

The ramp-up in Quellaveco alone contributed largely to the 52% (QoQ) growth of copper output to 244,000 tons. This increase is essential among miners due to the global rush in growing green energy. Copper is widely acknowledged as an efficient energy conduit. As such it is applied in renewable energy systems such as solar, hydro, thermal, and wind to generate power. When used in power transmission, copper lowers carbon dioxide emissions and the overall amount of energy needed to produce electricity. The red metal is also used in rechargeable batteries and charging stations for electric vehicles (EVs).

Anglo American's annual copper production grew 3% in FY 2022. Glencore's ( OTCPK:GLCNF ) copper production declined 12% (YoY) to 1,058,100 tons while Antofagasta's ( OTC:ANFGF ) production was 10% lower at 646,000 tons in FY 2022. In my view, this increase is commendable considering it had intimated its intention to cut 2023 copper production back in December 2022 due to low-grade ore grades in Chilean mines. Anglo's copper mines in 2023 are expected to produce between 840,000 tons to 930,000 tons down from 910,000 tons to 1.02 million tons.

The availability of deteriorating ore grades in Chile is a good reason to expand production into Peru. As we know, Chile is the top global copper producer with production at 27% followed by Peru at 10%. Additionally, various factors support copper availability in Chile such as the availability of water or rain. Antofagasta attributed its 10% (YoY) copper output decline largely to the drought in Chile that contributed to more low-ore-grades. The company produced 646,200 tons of copper (at the lower end of its production guidance range of 640,000 tons and 660,000 tons).

Other than copper, Anglo also saw a 7% (YoY) increase in rough diamond output to 34.6 million carats in FY 2022. Due to the prevailing circumstances, the company cut its production guidance to between 30 million and 34 million carats in FY 2023.

Woodsmith's project extension

Anglo American announced that it had taken a $1.7 billion impairment on the Woodsmith project, three years after it saved the company from a near collapse. This write-down was recorded after Anglo estimated that it would at least $1 billion for the Woodsmith mine to begin production by 2027. Back in 2020, Anglo agreed to raise £405 million (about $5 billion) to rescue parent company, Sirius Minerals which needed capital to build the mine by 2024.

According to me, this project supports a ground-breaking discovery. Firstly, it includes the sinking of "two 1.6km mining shafts" to access a rare mineral called polyhalite. Though it is not yet commercially proven (by Anglo), this mineral can be used as a source of fertilizer. One company currently engaged in the mining of polyhalite is ICL Group ( ICL ) formerly Israel Chemicals Ltd. In the UK, ICL sells polyhalite under the brand name Polysulphate. It owns the Boulby polyhalite mine located in North Yorkshire and the fertilizer is made available in 22 countries from Britain.

in FY 2022, ICL's Boulby produced up to 953,000 tons of Polysulphate and attributed its 44% (YoY) sales growth to the commodity. This novel organic fertilizer according to field trials (conducted by the company) is an effective multi-nutrient fertilizer. The company describes polyhalite as being located about 1,200 m below the earth's crust beneath the North Sea and along the northeastern coast of England.

According to reports, Woodsmith project will encompass the construction of a tunnel of about 37km needed to transport the material to the Teesside port. Anglo indicated that it had set aside $6.1 billion as capital expenditure to actualize the fertilizer project. Into 2023, it had already spent $1.35 billion and by 2027 it has planned to add $4.8 billion into the mix.

By 2030, the Woodsmith project is expected to realize about 5 million tons of polyhalite which will then be raised to 13 million afterward with increased design capacity. The mine's life is expected to exceed 50 years and will be a long-term investment for Anglo. After reaching its maximum production, I expect Anglo's CapEx in the project to reduce by up to a third especially when producing 5 million tons of the commodity.

Israel Chemicals ltd was the only company around the world selling polyhalite fertilizer. The price estimate for one metric ton of the commodity at the time ranged from $100 to $200. ICL However, Anglo has cited that it is modeling the project economics around the production of polyhalite and will likely price a ton of the commodity at $190. Similar products in the market cost $300 thereby giving the new polyhalite a competitive edge in terms of pricing.

Anglo's CEO Duncan Wanblad stated :

Be in no doubt that we are setting Woodsmith up to generate significant cashflows for many, many decades, we'll be building it out now until 2027."

Risks to be considered

Copper production struggles are destabilizing the price of copper. The commodity widely described as the global economic barometer is now trading about 20% below its March 2022 high of $5. The continual decline in prices may decrease production in 2023.

Anglo American also attributed its 47% (YoY) core profit decline to high energy prices partly caused by the ongoing Russia-Ukraine war. It also posted lower production guidance in 2023 indicating that we may continue to see low production volumes before it steadies. Additionally, the decline in metal prices does not make it better for the company since it is already reporting an increase in production costs.

Anglo announced a lower dividend of $0.9 billion, down 57.14% (YoY) equal to $0.74 against $1.18 paid in 2021. Despite the decline, Anglo stated that the payout was still in line with its 40% payout policy Overall, the total dividend and buyback per share declined 60% (YoY) to $1.98 in 2022 from $4.99 in 2021.

Bottom Line

The commissioning of Quellaveco into 2023 renews investor confidence in an increase in copper production in 2023 and beyond. I believe that the year 2022 saw Anglo American surmount many headwinds including volatile mineral prices and the inflationary pressure to post encouraging results. Despite the decline in core profit and an increase in net debt, AAUKF has assured of its commitment to stabilizing performance across all its operations. I also think that the polyhalite fertilizer will prove a formidable source of revenue in the future. I will recommend a hold rating for the stock in readiness for the Q1 2023 performance scorecard to be released later in April 2023.

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