2023-07-05 14:54:29 ET
Summary
- Recent events suggest change is en route at Anglo American plc.
- De Beers' recent Botswana sales agreement lends Anglo's investors much to cheer about.
- A managerial shakeup is in full swing with "next generation" leadership emphasized.
- Kio Kumba is pushing for a railway lease deal with the South African government.
- Investors must consider past and future impairment charges with caution.
Today's article focuses on Anglo American plc (AAUKF) , and serves the purpose of updating investors on overlooked events that occurred in recent months. As such, our goal with the article is not to provide investors with a price discovery analysis but, instead, to add to market transparency. Without further ado, let's get stuck into a discussion about a few of Anglo's latest events.
Critical Activity at De Beers
Anglo American has finally reached a deal with Botswana's government to extend its right to sales term (for rough diamonds) by ten years. The deal is in principle and also includes a new 25-year mining right for its Debswana asset.
Anglo's diamond operations accrue through its De Beers subsidiary. The subsidiary mines approximately 70% of its rough diamonds in Botswana and sees the nation as crucial to its strategic outlook. While still somewhat reliant on its Venetia mine, De Beers is pivoting out of South Africa and into lower-cost jurisdictions.
As things stand, diamond production, midstream, and sales still formulate a significant part of Anglo's EBITDA mix. Moreover, the firm realizes significant margins from its diamond endeavors as it hosts dominance throughout the value chain. Thus, the Botswana agreement ought to bring much delight to Anglo's shareholders.
Kio Kumba's Quality and a Potential Railway Deal
Anglo American owns approximately 69.71% of Kio Kumba, meaning it owns the right to consolidate the subsidiary's financial results holistically and not proportionately, which is critical to note before assessing Anglo's base metals output.
For those unaware, Kumba is a base metals producer situated in South Africa with operations in the Northern Cape. Moreover, the firm has first-hand access to South Africa's Sishen railway line, which is a dedicated iron ore line that runs to Salldhana Bay, the nation's largest export terminal.
In recent events, it was revealed that Kio Kumba realized best-in-class prices for its iron ore, even beating the likes of Vale (NYSE: VALE ) and BHP Group (NYSE: BHP ). Although it hosts a high stripping ratio, Kumba's Iron Ore quality is sublime, which is partially why the entity has an EBITDA margin 200% higher than the industry median.
In arguably more substantial news, Kio Kumba is trying to negotiate a working relationship or a lease with Transnet (South Africa's national railway company) to redevelop the Sishen-Saldanha railway line to enhance the firm's capacity.
For those unaware, South African railways and other infrastructure are in tatters after years of mismanagement from the South African government. However, the signs are that government is willing to cooperate with the private sector to restore critical infrastructure such as the energy grid and railways. Kumba tabled an offer to Transnet in March , which was rejected due to Transnet's reluctance to accept industry-standard lease terms; however, in our view, Transnet is likely to buck at some stage, which could lead to a private-public sector partnership.
Managerial Changes
Anglo American has decided to refresh its management with a particular focus on production-related leadership. The group is pivoting into "new generation" leadership. There seems to be a blend of external and internal recruitment, implying that a shift in value-creation strategy is en route.
Here are a few changes to take notice of.
- In February, Al Cook joined as CEO of De Beers from Equinor (NYSE: EQNR ). Al's experience is aligned with international exploration, lending him the latitude to lead the entity into an era of severe change within the firm's end markets.
- Allison Atkinson has assumed the role of project management director, bringing along a host of experiences after a successful career at AWE, a U.K.-government-sponsored entity.
- Natascha Viljoen is departing Anglo American Platinum ( ANGPY ). No replacement has been announced; however, the view is that Amplats will hire from within, suggesting little change of strategy (keep in mind that Viljoen is an unplanned departure).
- Anglo's CFO, Stephen Pearce, will retire at the end of the year, stepping down from a role he held since 2017. Similar to Viljoen, Pearce's successor has not been announced.
Valuation With Consideration To The Woodsmith Impairment
Anglo American's stock has a price-to-book ratio of 1.26, which is approximately 6.87% below its midpoint. Keep in mind that Anglo's latest financial results included a significant impairment loss on its Woodsmith asset (a fertilizer mine), amounting to $1.7 billion . The project's asset base was impaired due to its stretched development phase, higher-than-usual interest rates, and unfavorable pricing environment.
Looking ahead, it won't be surprising if Anglo's asset base suffers additional impairments during its full year in 2023, as the salient features of the mining industry point in that direction. For example, as already mentioned before, interest rates are high, commodity prices are depressed, comparable transactions are lackluster, and so forth.
I reiterate what is mentioned in the introduction. This is not an article aimed at price discovery. Yet, we outline Anglo's valuation as a critical risk leading up to its prospective financial results ( next expected July 27 post-market).
Final Word
Anglo American's corporate profile has experienced a few adjustments in recent quarters, with substantial events occurring. Firstly, De Beers' deal to extend its Botswana material sales rights serves as a significant victory as the entity continues its pivot out of its status as a South Africa pure-play. Furthermore, factors such as a shake-up in Anglo's managerial department and potential base metal railway deals with the South African government might play a significant role for years to come.
Lastly, Anglo American plc stock's valuation must be considered with caution, as impairment risks are front and center.
For further details see:
Anglo American: Noteworthy Developments