Coal is on its way out. Demand for copper is set to grow, and I think demand for iron is heading upwards too. Then there is potash — a combination of potassium carbonate and potassium salt, which is used as a fertiliser. Together, the potential in copper, iron ore, and possibly potash, are the reason why I think Anglo American (LSE: AAL) could be that rare thing, a good income stock with growth potential.
Anglo American has made a bid to buy Sirius Minerals (LSE:SXX), the British company desperately trying to raise money to develop a potash mine in North Yorkshire. The story of the British potash company and the lesson for investors is now well known, but just because the Sirius Minerals share price has fallen by around 90% in the last four years or so, it doesn’t mean the company’s core product is no good. Its problem was always that it needed money, lots of money to develop the mine, and was probably just too small to convince investors it had what it takes to make the project a success.
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Now the Anglo American bid for Sirius Minerals could potentially save the mine. Should the mine one day fulfil its potential, it would be a good addition to Anglo American. While the deal may prove to be make or break for the potash mine, it’s just another deal for Anglo American.
The mining giant’s big problem is its reliance on coal. Anglo American has been moving into other areas and weaning itself off coal mines for some time, meaning that the company looks quite different than it did 10 years ago. The bid for Sirius Minerals is further evidence of this, and the company is investing in other areas too, such as the development of a copper mine in Peru.
It’s Anglo American’s non-coal-based mines that make it interesting. Recently, Deutsche Bank predicted a rebound in global demand for metals in 2020 and highlighted Anglo American as one of the potential beneficiaries.
In 2019 the company generated $2.6bn in revenue from copper, but this could increase dramatically with the new Peruvian mine. Copper is especially interesting because of its importance in electric cars and charging stations.
Last year, Anglo American’s revenue from iron ore was close to $4bn. I believe demand for iron is also set to rise in the long run. I am expecting massive new infrastructure projects worldwide as governments realise they can borrow at close to 0% and that infrastructure programmes can provide economic stimulus while raising long-term productivity. (Interestingly, coking coal, which is used in blast furnaces and is still a major Anglo American product, may be the last application of coal to go.)
Anglo American is also a big dividend payer, and the problem with many income stocks is that they operate in mature industries with limited growth potential and face disruptive threats from new technologies. Anglo American, with its traditional emphasis on coal, could so easily have been another example of such a company. Last year, Anglo American’s coal output was worth $3.2bn – important but far from vital. It’s the combination of investments into growth areas and good dividends that I believe make Anglo American so appealing.