AGPPF - Anglo American Platinum H1: Cyclical Pressure Remains But Positives Exist

2023-07-25 14:04:10 ET

Summary

• Anglo American Platinum Limited's first-half results suggest the firm is struggling with cyclical headwinds. However, we see matters differently.
• In our view, the firm is near its cyclical bottom, with key indicators suggesting a better consumer outlook and fewer supply-side concerns.
• Development of the Middelaagte mine and the potential normalization of Mogalakwena provides a basis for improved full-year results.
• Reduced load-shedding is an overlooked contributing factor.
• We believe Anglo American Platinum stock is a promising contrarian play with a solid dividend profile.

Anglo American Platinum Limited (ANGPY) released its first-half interim results on Monday, revealing a slump in profitability due to cyclical concerns and headwinds from systemic issues within its primary operating regions. Although the firm's latest results don't present much to cheer about, a forward-looking analysis juxtaposes a bearish argument, lending us an opportunity to provide our readers with a contrarian view in today's article.

Here are a few things to consider after Anglo American Platinum's (Amplats) first-half (H1) results .

Latest Results Explained

Amplats' H1 results sowed both supply and demand-side concerns, as production across its six platinum group elements and ancillary materials landed softer while price realization also disappointed. As a result, the company's net revenue dipped by 24% year-over-year while its earnings-per-share slipped by an astronomical 71%.

Much of Amplats' poor results were tied to its flagship mine, Mogalakwena, which delivered lower grades than usual and was impacted by a maintenance shutdown. In addition, the Amandelbult complex's production also slumped during the period amid infrastructure closures, which led to over-reliance on the Unki and Mototolo mines.

Furthermore, platinum group metals, or PGM, price realization continued to slip during the firm's first half ( -29% year-over-year ), driven by cyclicality. In our view, the economy has traversed from late-stage expansion in early-2022 into a cyclical decline in late-2022/early-2023, leading to lower commodity prices. Although Anglo American Platinum has access to some of the highest-grade PGMs in the world, the economy needs to "bite" for higher PGM prices to occur, which is unlikely to happen in a macroeconomic environment characterized by high-interest rates and inverted yield curves.

To conclude this section, I want to reiterate that Anglo American Platinum has struggled with electricity and infrastructure issues in South Africa during the past 18 months. The result has been a build-up of 66 400 ounces in work-in-progress inventory, causing a drag on the firm's working capital efficiency. Moreover, constant load curtailment generally results in breakages, leading to higher maintenance CapEx instead of expansionary CapEx.

Potential Turning Points

Exogenous

The good news for investors is twofold. Firstly, Amplats' stock surged by 2.54% on the day its H1 results were released, meaning the market probably expected its results to settle much worse. Secondly, the firm's newly realized forms a new baseline, and it's all about the outlook from here on in.

Let's do a top-to-bottom analysis of Anglo American Platinum's salient features to determine its outlook.

Firstly, PGM prices might stabilize in late 2023 and recover in early 2024. We base our claim on two indicators, namely the anticipation that global interest rates might start receding in early 2024 and the fact that consumer sentiment has started improving in the U.S. , Europe , and China . Amplats' PGMs rely on durable goods sales, which is a cyclical domain and inextricably linked to consumers' willingness to spend aggressively.

In other good news, load-shedding in South Africa is starting to abate . Factors such as lower unit breakdowns, lower fuel prices, and fewer wage disputes have provided a breath of air to the South African public and its miners alike. Moreover, we believe Eskom will outsource work (and power generation) to the private sector in the coming years in an effort to save its reputation, leading to improved long-term energy supply.

Endogenous

Further to its exogenous value drivers, a few internal issues are set to align at Amplats.

The company's Polokwane smelter rebuild has presented significant challenges of late as it diluted Amplats' capacity to operate its vertically integrated business model. The smelter's rebuild has finally been completed and is set to ramp up to its 650 000 tonnes per year capacity.

Another overlooked talking point is the pending expansion of the firm's Amandelbult complex via the initiation of the Middelaagte mine . Middelaagte is an open-cast mine that forms a third pillar within Amandelbult, which, if successfully mined, could ramp up production to between 110 000 tonnes and 180 000 tonnes per month. Middelaagte is set to deliver early ounces by the end of this year, which might play a significant role given the mine's open-cast and high-quality characteristics.

Lastly, as mentioned before, Mogalakwena suffered from lower grades and unplanned maintenance during Amplats' H1. Mogalakwena is the company's flagship mine, and a return to normality might play a crucial role in improving the Amplats' year-end results.

Stock Price Action & Dividends

Anglo American Platinum's stock seems undervalued on a relative basis. Most of the stock's price multiples suggest it trades at a discount to its cyclical average and sector peers. Given the company's best-in-class status and a potential cyclical recovery, we anticipate the implied value to be captured at some stage.

Anglo American Platinum has a dividend policy constituting payout worth 40% of the firm's headline earnings, contributing to an average 3-year dividend yield on cost of approximately 5.09% . In our view, investors will not be let down by Amplats as a dividend stock; the firm has a stronghold within the PGM arena and has a solid track record as a dividend payer. Moreover, an interest coverage ratio of 228.59 speaks volumes as it conveys solvency.

Noteworthy Risks

Anglo American Platinum participates in a cyclical industry. As such, there is no guarantee that the firm's recent dip in performance presents a "buy the dip" opportunity. In fact, the company's subdued results might sustain until the global economy reaches an expansionary stage. Thus, the factors mentioned in the "latest results" section can be considered ongoing risks.

Furthermore, Amplats' attractive relative valuation metrics do not guarantee future value realization. As a matter of fact, price multiples are known as "standardized statistical measures," which are intended to convey a very long-term measure of fair value and not an intermediate measure. Moreover, the financial markets are rarely mean-variance efficient; thus, Amplats' price multiples might be a bogus indicator of value.

Final Word

Anglo American Platinum's 2023 first-half results settled much lower than the year before. However, the stock's initial response suggests the market anticipated worse results.

We remain positive on the stock as a contrarian play, as key indicators suggest that PGM prices might find calm and internal features imply Anglo American Platinum is on a recovery course.

For further details see: