Anglo American: Too Cheap To Ignore (OTCMKTS:AAUKF)

Following Anglo American (OTCQX:NGLOY) (OTCQX:AAUKF) reset expectations in early December 2023, the company’s Q4 2023 realized commodity prices and operating performances align with previously communicated guidance. We can conclude that “No news is good news.” That said, Anglo is one of the largest diversified mining companies worldwide. It is headquartered in London and listed in ISE as well as in the FTSE. Anglo American’s leading commodities are iron ore and copper. Our team believes the company’s risk/reward is extremely attractive.

Indeed, Anglo significantly underperformed over the last two years (-38.86% in stock price decline in 2023 and -12% YTD), and we forecast a meaningful upside risk to the evolution of copper prices due to the EV transition. In addition, on a downside scenario, Anglo offers a minimum dividend policy of 40% of earnings, and on the upside, it has two world-class projects. Here at the Lab, we performed two specific research studies on these new developments: 1) the Quellaveco copper mine in Peru (which is already delivering positive results) and 2) the Woodsmith polyhalite project in the United Kingdom.

Q4 Production Analysis

Before moving on with our update, reporting the latest CEO’s words is crucial. Duncan Wanblad sees “significant value upside from operational resilience, reducing complexity, and growth opportunities.” Post Q4 release, we confirmed our 2024 EBITDA forecast at $10.6 billion (7% down versus our previous estimate).

Anglo Q4 key takeaways that support our numbers are the following (Fig 1):

• Starting with Copper production, the company lifted output by 20kt in Q4. This is backed by Quellaveco Mine achieving a quarterly record. That said, the company flags temporary lower grades in H1 offset by Quellaveco development in H2. Therefore, we applied no changes in our estimates;
• Looking at the Iron Ore, Minas-Rio also delivered its highest-ever quarterly volume of 6.6 million tonnes. Despite that, the company curtailed production by 2.5Mt for rail capacity maintenance to alleviate mine stockpile constraints. In addition, cross-checking the Q4 performance, the realized price of iron ore was $117 (15% above the benchmark). As reported in our BHP Group’s latest guidance, and despite iron ore slides to the lowest since November 2023 due to China demand, our longer-term assumption on iron ore prices is set at $85/t;
• On the Diamonds division, it is crucial to report that the DeBeers lifted inventory by approximately 5Mcts in Q4. We believe destocking activities will move on in 2024. The company slightly decreased the production guidance, and Q4 sales were decremental given a lower realization price ($83/ct). Our team believes that the diamond market is stabilizing after H2 2023. That said, we already reported our pessimistic view on the Q3 analysis report, and the latest rumors on potential writedown on the De Beers diamond unit confirmed our negative sentiment. Our team sees the potential for the company to impair Diamond’s assets. The Diamond division book value is at $8.4 billion, and in our estimates, it is now at $6 billion. That said, this does not create any change in the company’s operating cash flow;
• On a positive note, met-coal production was lifted by 9% to 4.8Mt in Q4. This was due to the solid performance of Aquilla & Grosvenor, which offset Moranbah geology challenges. Realized price was strong due to the mix, and the output is expected to be stable in 2024;
• Platinum Group Metals production fell by 9% quarterly due to Kroondal’s disposal and planned maintenance of the Amandelbult site. On a positive note, refined production increased by 31% following smelter maintenance in Eskom.
• As reported by the company: “All 2024 outlook is unchanged from the December investor update“.

Source: Anglo American Q4 2024 Production Report – Fig 1

Fig 2

Conclusion and Valuation

We believe that a downside scenario is already priced in. We anticipate an EBITDA of $10 billion in 2023 with a net debt of $11 billion. Our estimates, aligned with the company’s payout, show a dividend per share set at $0.95 for 2024. In addition to a potential write-off of the diamond division, we might expect management to update Wall Street on cost savings initiatives to stabilize operational performance. With the confirmed unit cost guidance and production estimate (Fig 2), we see an Anglo 2024 EBITDA of $10.6 billion achievable, with operational performance upside thanks to savings and complexity reduction. In addition, we believe there is flexibility in CAPEX.

From a valuation standpoint, Anglo American is currently trading at <4x EV/EBITDA in the next 12 months, compared to a historical five-year average of 4.6x. In December, we reset our expectations, lowering our target price to £28 per share but maintaining a buy rating status. Today, we confirmed the overweight, based on an EV/EBITDA of 4.5 multiple.

As usual, we point out to potential and current investors the risks inherent in the mining sector. This includes the volatile nature of FX and commodity prices. In addition, the company is exposed to political and operational risks. These risks have the potential to impact company performance significantly. Most Anglo assets are in South Africa, Chile/Peru, Brazil, and Botswana/Namibia.

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