I am out shopping for shares again. Should I add Anglo American (LSE: AAL) to my basket?
Anglo, American, South African
Investors in mining stocks are at the mercy of the latest economic data out of China. With the Chinese authorities struggling to rekindle belief in their growth story, South African mining giant Anglo American is down 18% over the past 12 months. That compares to a 12% rise on the FTSE 100. Is there worse to come, or is this now a good opportunity to buy?
When I looked at Anglo American last November, I said it was strictly for emerging market bulls. The company had been through turmoil, with Cynthia Carroll — its first female and non-South African executive — forced out following wildcat strike action, poor operational performance and project management failures. This year’s first-half figures showed a 28% drop in underlying earnings to £1.3bn year-on year, and a 15% drop in group underlying profit to £3.3bn. ROCE dropped to 11%, from 14% in the first half of 2012. Iron ore, coal and nickel production all fell in the second quarter, while labour relations remain awkward. There was some positive news, with Q2 copper production up 14% to 182,900 tonnes and Q2 diamond production up 10% to 7.9 million carats, but new chief executive Mark Cutifani has his work cut out.
China syndrome
Cutifani is reviewing Anglo American’s 95 operations and products, a process that “indicates that we do not require wholesale change to our portfolio, but we do need to become much more disciplined, more effective and more efficient”. He is working to deliver $1.3bn a year of cost savings by 2016, through better capital allocation, improved leverage of production scale and diversification, supply chain improvements and company restructuring. Cutifani is also aiming to drive ROCE up to 15% over the same timescale.
Even if he does all that, Anglo American still needs China. It accepts that China’s underlying growth rate “should run well below the average rate of the last decade”, but is more optimistic about recovery prospects in the US, Japan and Europe. After hitting a 52-week low of £12.17 in early July, Anglo American has since rebounded to £15.23, a rise of 25%, helped by new figures showing Chinese factory output up 9.7% in the 12 months to July, from 8.9% in June.
A better growth option
Anglo American trades at 10.5 times earnings, which makes it cheaper than BHP Billiton at 13.4 times earnings, although you might find Rio Tinto better value at 9.4 times earnings. Anglo American yields 3.58%, covered 2.7 times, with the recent interim dividend maintained at 32 cents. That compares to BHP Billiton at 3.9% and Rio Tinto’s 3.49%. The recent change of chief executive has given the company a short-term lift, but tough challenges lie ahead, with Federal Reserve members “broadly comfortable” with the idea of starting QE tapering later this year. I might buy after we see the impact of tapering, but not before.
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> Harvey owns shares in BHP Billiton. He doesn’t own any other stock mentioned in this article.
