The Anglo American (LSE: AAL) share price has performed quite well this week. It has risen by around 4.5% at the time I’m writing. After suffering the week before with a 10% decrease in price, is it now safe to say that the drop was just a small stumble?
With expectations of inflation on the doorstep, will this raw material based share be a resourceful addition to my portfolio? Here, I will consider the pros and cons of Anglo American and decide if now is the time for me to buy.
What could inflation mean for the Anglo American share price?
During this time of post-lockdown recovery, a rise in interest rates from inflation could be devastating for the economy. However, commodity prices tend to rise during inflation and they can offer protection for investors against it. In times of inflation, we could see investors becoming bullish on commodity-centric industries and businesses like Anglo American.
On top of that, when the economy and marketplace is volatile, big name and well-respected companies usually prove their worth. Anglo American, I believe is one of those companies that can stand its ground amid rough waters.
Indeed, the company has produced positive reports. With a strong cash flow ratio of 22.6%, a high return on equity with a five-year average of 12.4%, and a five-year average operating margin of 18.8%, Anglo American in my opinion is a strong performer.
In its half-year interim results, net debt has been reduced by $3.6bn due to strong cash flow. The company reported a attributable free cash flow of $5.4bn.
While I do think inflation would make investment choices uncertain, I believe that Anglo American, due to its size and strength should be able to weather the storm.
Is the drop in the price of platinum a concern?
Anglo American is the world’s largest provider of platinum, accounting for 40% of international output. In 2021, the price of platinum dropped. However, this hasn’t seemed to trouble Anglo American too much as investors are still seemingly supportive of the multinational mining company. In fact, the Anglo American share price has risen by almost 70% in the last 12 months.
Anglo American’s other assets such as copper, nickel, diamonds, and iron have performed well in the last year. So, despite platinum underperforming, Anglo American’s diversity offsets this dip.
There is also a final concern over the rising Covid-19 cases in China. This Asian market is a key area of consumption for Anglo American. If consumption were to drop in China, this could have adverse effects for the mining company.
Will I be buying now?
The drop in the price of platinum and the rising delta cases in China are areas of concern for me. Moving into September, we could see the Anglo American share price suffer because of these factors.
However, I think Anglo American looks like a solid choice as a share to survive inflation costs. I am overall bullish on buying this share and I think it could gain momentum in the next few months, especially if inflation increases. Overall, I’d buy this share as a growing momentum investment and inflation guard.
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John Town has no position in any of the shares 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.