Miners are looking to prune their corporate trees to counter a business-cycle contraction, but capital ties and takeovers should not be ruled out. In this context, Anglo American (LSE: AAL) is an obvious takeover target and could benefit from an M&A binge that has recently captured the headlines in less cyclical sectors.
Oh Miners, Dear Miners
Several factors do not bode well for the mining sector.
Miners have slashed projections for capital expenditures in the last couple of years. In spite of lower investment, oversupply still threatens many of their end markets — and is here to stay. In fact, it does look increasingly unlikely that China will bail out the West in the long run.
China needs higher growth in domestic consumption to render its gross domestic product more sustainable and balanced. Inevitably, its focus will continue to shift. For global miners, this means demand will remain subdued in years ahead. The “new normal” is not something their shareholders will enjoy.
Anglo American: The Star Performer
Shedding assets is the name of the game in town, so Anglo American is not the most obvious choice for investors right now. It’s much smaller than truly global rivals such as Rio Tinto (LSE: RIO) and BHP Billiton (LSE: BLT), although its assets portfolio is more diverse.
Rio stock is down 5% in 2014, while BHP stock is up 5%. The star performer is Anglo, however, whose stock has risen by 15% in the last six months. How so?
Size. The answer is size.
With a market cap of £19bn, and an enterprise value of £30bn, Anglo American is tiny compared to its rivals. It’s less than half the size of Rio, and about one fifth that of BHP.
Bullish Estimates
Analysts are upbeat about Rio’s prospects, in particular. According to S&P Capital IQ consensus estimates, RIO will be able to grow revenue and earnings into 2016, while improving profitability. I think bullish estimates will have to come down at some point. For its part, BHP is less likely to improve earnings per share, but analysts believe the miner will become more profitable over the years, adding several basis points to its operating margin.
These are miners, at a critical economic juncture, that need divestments to improve their cash flows, aren’t they?
The problem with disposals right now is that sellers must get rid of their stuff at almost any price. Hence, deals are thin on the ground. Then, the way out is to buy assets and look for synergies.
Back To Anglo
In the last six months, Anglo American has outperformed bigger rivals on the stock market for no obvious reason, apart from its size, in my opinion. Essentially, it can be bought out.
Analysts expect a surge in revenue, rising operating cash flow and better earnings per share, but I think their estimates are way off the mark. Warning signs in the mining sector are apparent.
Moreover, if a takeover occurred it would signal that miners are deeply troubled, as they would purse mergers to extract meaningful synergies into 2020.
That, in turn, would simply mean two things: a) they must integrate their current offering with more products and ancillary services in order to retain their clients; b) they must combine their costs to cut the resulting cost base.
Anglo is appealing for both reasons.
The Press
In 2012, Bloomberg reported: “By acquiring Anglo’s assets in diamonds, platinum and steelmaking coal, the Glencore-Xstrata entity would vault past Rio and rival BHP.”
“Glencore’s CEO Seen Eyeing Anglo After Xstrata,” was the headline from Businessweek in February last year. Similar rumours have emerged again in recent times.
No surprise: Anglo American has been under the M&A spotlight for ages. Since 2007, it has rejected offers from both BHP and Xstrata. It would be harder to reject an approach right now, though.
