2023-04-20 10:03:58 ET
Summary
- Anglo American is offering a diversified product MIX which is suited for major global demand trends.
- Over the past 10 years, mining companies' production guidance has been 3% more optimistic. Anglo American managed to outperform their peers.
- Mining underinvestment and commodity demand will be a positive catalyst for the company. Our buy rating is then confirmed.
Here at the Lab, today we are taking advantage to perform a brief recap on the mining sector. Since our Anglo American ( OTCQX:NGLOY ; OTCQX:AAUKF ) initiation of coverage released in July, we are positive by more than 15.66%; however, since February 2023, the company's stock price has lost ground by 14.98% (including the dividend payment). As a reminder, our investment buy rating is supported by the following: 1) a Balanced Approach To Earnings Diversification (Fig 1), 2) a mining ramp-up on copper, and 3) a favorable exposure on the Platinum Group Metals which support secular megatrend growth in the EV, semiconductor and renewable energy fields (Fig 2).
Mare Evidence Lab's previous publication Anglo-American commodity MIX
Source: Anglo American Sustainability Performance Report H1 2023 (Fig 1)
Fig 2
As already mentioned, over the past 10 years, production guidance from mining companies has been 3% more optimistic. Negative performance was also recorded in 2022 with a minus 6% output compared to the expected guidance. This was due to operational difficulties recorded in Chile. Since its 2018 peak, aggregate supply has contracted 11% and this was due to operational disruptions and underinvestment that lead to bottlenecks in the manufacturing processes. As for this year, miner players are aiming for a 2% increase in production on an aggregate basis. Looking at the past (and this is key to asses future implications), 2017 was characterized by serious interruptions in the extraction processes of copper material. Escondida mine weighed 20% on the volumes of BHP (BHP) and Rio Tinto (RIO) and was the key negative driver for that year . At that time; however, looking at Glencore, Anglo-American, and First Quantum, they saw no decline.
Anglo American take
Concerning Anglo American, and looking at the past decade's performance, these were the main company's miss: diamonds signed a -3%, copper -1%, platinum and palladium -7% respectively, coal -1%, and nickel +2%. Over the long-term horizon, it is difficult to find a correlation between actual volumes, projected volumes, and commodity price changes, but some commodities are more prone to reacting to supply changes than others, while other commodities take longer to materialize a response.
According to a few equity research houses, industrial players have already filled their wallets with commodity contracts, pricing a China-led rebound in the global economy. Indeed, the Asian country is responsible for part of the fluctuations in the copper price, which also remains anchored to the US macroeconomic data and the FED monetary policy moves. In detail, there is a Chinese risk of lower economic growth, so a few Wall Street analysts decided to cut 0-3 months copper contract estimates from $10,000 to $8,500. This was also related to a slowdown in the Chinese credit sector and unemployment expectations. As a consequence, the recent Anglo-American stock price performance is explained.
However, looking at the growth prospects, China consumes more than half of the world's refined copper, and its demand has increased eightfold over the past four decades. Therefore, Chinese manufacturing activities are inevitably a key driver for copper prices. China is also a key source of green copper demand. Chinese subsidies to electric vehicles have significantly increased to the point that BYD is outperforming Volkswagen in China and it is globally competing in the EV race with Tesla (TSLA). Although the subsidies for manufacturers end this year, the tax exemptions for buyers will remain in place until 2023. The Anglo American commodities mix will be further supported by the deployment of charging infrastructure, a key component of China's 14th Five-Year Plan released in December 2022. A battery electric vehicle may require three to four times as much copper as an internal combustion engine vehicle of similar performance. Similarly, a 200-kilowatt fast charging station uses about 8 kg of copper. A similar multiplier effect on copper demand is given by other applications linked to the energy transition, such as renewable wind and solar energy, in which China is investing heavily. In numbers by 2030, Goldman Sachs believes that 80% EV will be electric with a growth estimated by more than 80%, while the Chinese capacity of renewable energy is expected to more than double. Consequently, domestic market demand for copper and aluminum will grow by 55% and 91% respectively, while that of lithium, cobalt, and nickel will expand by 2 to 4 times.
Conclusion and Valuation
While BHP and Rio Tinto have 3/4 of their total EBITDA skewed versus iron ore productions, Anglo is much more diversified. In detail, 50% of Anglo production is related to Copper, Nickel, and Platinum Group Metals. In the last earning report, the company had a 5% beat versus Wall Street estimates and was supported by De Beers (Anglo's diamond division). The company's commentary indicated that jewelry segment demand will remain stable, but they continue to flag potential downturns from the consumer end. Going to the numbers, the dividend per share was a positive surprise and was driven by higher commodity prices, with a shareholder's remuneration set at a 40% payout, we implied an interim dividend of $0.67 per share. However, we should recall that the company has historically increased its remuneration policy with special dividends and share repurchases. Net financial debt was lower than estimated and there is a 0.6x net debt/EBITDA. Thanks to the latest presentation, the company seems to be making good progress against its emission targets, with a Scope 1&2 reduction of minus 8% on a yearly basis, lower water withdrawals (-3%), and lower injury rates that signed a minus 2% compared to last year (-2%). Here at the Lab, after a minus 15% in stock price performance, and based on the company's 2023 guidance, we decided to leave unchanged our valuation. Anglo is currently trading at 4.08x its EV/EBITDA, while our target price is derived with a multiple of 5x that indicated a target price of £35 per share . CAPEX underinvestment and secular trends are supportive catalysts that cannot go unnoticed. Therefore, Anglo is a clear buy at this price.
For further details see:
Anglo American: Let's Take Advantage Of A 15% Decline