2023-12-13 22:40:14 ET
Summary
- Anglo American's production outlook has been reduced.
- The company is targeting an additional $500 million in cost savings by 2024.
- The future: Copper and Fertilizer. We still see an unappreciated product portfolio, and our buy is confirmed.
Here at the Lab, taking advantage of Anglo American stock price decline (NGLOY) (AAUKF), we decided to enter. Looking back to our analysis, it is essential to report that mining companies' production outlook has been 3% more optimistic over the past ten years. Still, Anglo American managed to outperform their peers. Despite that, we also reported the difficulty of finding a correlation between actual volumes, projected volumes, and commodity price changes . Last week, the company presented a Business Update . The key findings of the press release were higher production expectations for 2023 and lower production estimates for 2024 and 2025. Anglo American also adjusted its CAPEX plan projection, which is lower than previously set. Here at the Lab, we upgraded the company to a buy following deep stock price underperformance and continue to see an attractive cyclical value. Still, to support our investment, Anglo has a more Balanced Approach To Earnings Diversification compared to other mining companies. In Q3, in line with our thesis, we also analyzed the upside of the new Woodsmith fertilizer project. As we usually perform in chemical companies, mining companies are a buy when macroeconomic risks are elevated. In addition, our internal team is confident that diamonds and PGM segments are approaching the bottom. We still see a deep value supported by an Unappreciated Product Portfolio , but we also acknowledge last week's reset is a hit to Wall Street's and investors' confidence in management.
Anglo American update and our Changes
- The company's 2024-2025-2026 production outlook estimates were cuts. However, what is more relevant is that the 2023-2024-2025 copper production forecast was reduced by -2%/-9%/-9% compared to Anglo's previous outlook. The lower outlook was mainly driven by weaker-than-expected production across most operations, particularly in Chile and Peru. The company presented operational changes, moving the Copper Chile facility to Los Bronces to lower unit costs by 15%. It also reported a negative impact on the El Soldado mine. The copper outlook reset for the next two years is material, and we are talking about approximately 200 ktpa downgrade. In addition, the company reported geotechnical faults at the Quellaveco that cannot go unnoticed;
- For the above reason, the company is announcing bigger-than-expected cost cutting and is targeting an additional $500 million in savings by 2024; 2024 unit costs are expected to fall by 1%;
- More importantly, the company cut 2023 CAPEX guidance by $200 million (3%). 2024 investments are set at $5.7 billion (or $4.8 billion excluding the Woodsmith project) and are at minus 14% compared to previous estimates. In 2025, Anglo also lowered its CAPEX plan to $5.7 billion. Overall, we now cut the company investment by $1.8 billion in the 2023-2026 period;
- On a negative note, we now forecast a working capital build of $1.5 billion. This compares to our internal estimate of $1.3 billion. In 2023, the company's effective tax rate is guided at 39% vs. a previous estimate at a mid-point of 37%. According to the Anglo release, this is due to profit MIX in higher tax jurisdiction countries. Higher tax and working capital requirements mean lower dividend payments;
- For the above reason, we re-modeled our numbers and are now forecasting a lower EBITDA. Our 2024 EBITDA projection reached $10.6 billion and is down by 7% compared to our previous internal estimate. With the new numbers, our team's operating cash flow projections are $9.2 billion in 2024, with a slightly lower debt burden. In 2023, lowering the CAPEX and considering higher WC requirements, we arrived at a net debt of $9.4 billion.
Conclusion and Valuation
Following the business update, EBITDA reduction seems significant because lower CAPEX and costs sustain Anglo's cash flow development. Despite that, we reduced our target price to £28 per share from our previous £32 per share valuation . Looking at the comps (BHP and Rio Tinto), the company has a higher FCF yield, a lower CAPEX burden, and more profit diversification. In addition, Anglo American has many levers to de-risk its portfolio. For instance, management reiterated the optionality of partnering with the Woodsmith project; however, no details were provided. Even if the company is reducing production guidance in the Quellaveco mine, the copper operating profit is set to become Anglo's leading P&L contributor, and here at the Lab, we are not changing our view on this commodity (EV, energy transition, Chip industry heavily rely on the material ). As a reminder, the company's profits are a function of the commodities prices of its main products (copper, platinum, iron ore, coal, and nickel). Anglo's stock tends to trade based on the evolution of commodity prices. After the recent correction, we believe that Anglo's current price presents a compelling value.
For further details see:
Anglo American: We Are Resetting Expectations, Maintaining A Buy