Anglo American (LSE: AAL) was one of my value tips for 2014, and I recently confirmed the mega-miner as my pick of the big London-listed miners.
However, the picture is changing, and in this article I’ll explain why the planned sale of its platinum mines is good news for Anglo’s shareholders, and update my recommendation for Anglo shares.
Platinum problems
The problem with Anglo’s platinum mines is that they are deep underground, labour-intensive and dangerous. They also have large, strike-prone workforces.
The two mines Anglo is hoping to sell, Rustenburg and Union, employ around 20,000 people. These mines were at the heart of this year’s five-month strike action, which caused platinum production to fall by 39% during the first half of 2014, compared to the same period last year.
Mechanising these deep mines will be difficult, doubly so because of the industrial unrest that could result from large-scale redundancies.
For Anglo, these inefficient and volatile operations are an expensive distraction, and I believe the company is right to say that capital and management time can be better used elsewhere.
Anglo vs. the rest
Anglo’s rocketing share price has outperformed its peers by some margin this year, leaving the South African-based miner looking considerably more expensive than its main peers:
| 2014 share price performance | 2014 forecast P/E | 2014 forecast yield | |
| Anglo American | +20% | 15.7 | 3.3% |
| BHP Billiton (LSE: BLT) | +10% | 13.0 | 3.6% |
| Rio Tinto (LSE: RIO) (NYSE: RIO.US) | -3% | 10.9 | 3.7% |
Rio and BHP both look good as income buys, in my view.
I see BHP’s premium to Rio as the result of BHP’s large petroleum business, which offers attractive diversity if you don’t already have exposure to oil and gas through one of the oil majors.
On the other hand, Rio’s cheapness provides low-risk exposure to the world’s largest and most profitable iron ore mines, with coal, copper and aluminium thrown in, almost for free.
What about Anglo?
I reckon Anglo is beginning to look a little pricey.
My original value buy rating was based on Anglo’s discounted valuation: at the start of this year, Anglo’s prospective yield was 4%, and its shares traded on a forecast P/E of just 10.5, and were valued at less than their book price.
That’s all changed; Anglo’s valuation is now more expensive than both its peer group and the FTSE 100 average.
In my view, pure value investors may now want to take profits on Anglo.
However, income investors who bought the shares when they were cheaper can sit back and enjoy an above-average yield on cost, which continues to be de-risked by CEO Mark Cutifani’s turnaround plan.
