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3 reasons why the Anglo American share price dropped 12% last week

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A miner down a mine shaft
Image source: Getty Images.

On Friday, the FTSE 100 dropped over 1.5% in a single day to end the week on a sour note. For Anglo American (LSE:AAL), Friday simply compounded a bad week all round. The Anglo American share price was the worst performer in the FTSE 100 index last week. It fell over 12%, to close the week just above 2,700p. What happened?

Falling palladium, rising inflation

When a stock falls in double-digits in a single week, there are usually several things that contribute to it. This was the case with the Anglo American share price. 

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The first reason for the tumble was related to the price of palladium. It’s a precious metal that has several important uses. The largest use of palladium is in catalytic converters for cars and other vehicles. Anglo American is the world’s largest producer of this metal, contributing 40% of the total supply.

Logically, when a company is quite concentrated around one product (or in this case one metal), its business can be overly impacted by it. So when the price of palladium dropped 10% last week to $1,048 per oz, it was always going to hurt. This move lower was also seen in other precious metals, including gold.

This drop also ties into another reason why the Anglo American share price fell last week. There are increasing concerns around rising inflation in both the US and the UK. A knock-on reaction to this would be for central banks to raise interest rates. Since gold and other precious metals don’t pay any interest, these lose their shine for investors, and usually drop in price.

Another impact of higher interest rates will make it more expensive for Anglo American to refinance and issue new debt. The interest repayments will be higher than currently. In the 2020 results, it showed net debt of $5.6bn. Although this isn’t out of control, it’s still a significant number.

A dip in Anglo American shares worth buying

Another issue that was flagged up last week was a lack of controls and excessive risk at a mine in Australia. Last May, a mining blast injured five workers. An inquest now released showed that the company failed to manage dangerous gases in the area for months before the issue happened.

Anglo American has said that it is putting more money into safety initiatives as a result. This event is bad PR for the business, and therefore is a contributor to the share price falling last week.

Despite the above issues, I don’t think the 12% fall last week will be a catalyst for a much deeper drop in the Anglo American share price. I think that the precious metals market should stabilise after the inflation shock has been fully processed. I also think the mining issue in Australia will be addressed and can be resolved.

The business is fundamentally sound and profitable. The share price is still up over 51% over one year, despite the drop last week. So on balance I would consider buying the stock now on this dip.

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jonathansmith1 has no position in any company mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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