Anglo American (LSE:AAL) shares tanked in early morning trading on Monday. The stock fell as much as 6% on the back of news that China is bringing in new Covid-19 restrictions.
Monday’s fall extended losses over the past month. So maybe the current dip is a good time to buy? Or perhaps this stock isn’t right for my portfolio?
What’s behind Monday’s fall?
Markets reacted to news from China on Monday morning.
Multiple Chinese cities are adopting fresh restrictions, from business suspensions to lockdowns, in an effort to slow the spread of Covid-19 infections.
The commercial hub of Shanghai is preparing for more mass testing after authorities detected the BA.5 Omicron subvariant.
Beijing has said that curbs must be as targeted as possible in an effort to minimise damage to the economy.
The highly-transmissible BA.5 variant has been shown to be able to escape vaccine-triggered antibody reactions, more so than other variants.
This hit Anglo American hard as a producer of metals and thermal coal. China is a huge metals importer and the world’s largest coal consumer. In 2020, the nation accounted for 56% of global coal consumption.
Anglo American is also world’s largest producer of platinum, as well as being a major producer of diamonds, copper, nickel and iron ore. Anglo American’s production of platinum accounts for around 40% of world output.
Why I’d buy Anglo American?
Anglo American stock is actually down 30% over the past month. That’s a considerable fall. Concerns over negative economic forecasts have pulled commodity prices downwards. This resulted in the Anglo American share price falling.
In fact, it’s currently trading near its year-low. For me, now represents a good time to buy. There are several key reasons to buy Anglo American.
For one, it has an attractive 7.6% dividend yield, which is considerably more than the FTSE 100 average.
It’s also trading with a price-to-earnings (P/E) ratio of just 4.7. That reflects the firm’s stellar performance in 2021, but also the falling share price.
The mining stock recorded $17bn in pre-tax profit last year. This performance had been sustained in 2022 as commodity prices soared in the early months of the year.
I also believe that, despite the current weakness in commodity prices, we’re entering a period of scarcity. This period of scarcity will be defined by more competition for resources and higher commodity prices for the long run.
However, mining stocks operate in what is traditionally a cyclical industry, hence the lower P/E ratios. Mining companies will typically do well when economies are running hot, but poorly when economies contract. As such, the current negative economic forecasts around the world are certainly not good news for Anglo American. But I believe the downturn is already being factored in to the share price.
Despite the cyclical nature of the industry, I’m positive on mining stocks and Anglo American. As a result, I’d buy it at its current price.
