Anglo American (LSE: AAL) shares took a dive in 2022 when mining stocks headed downwards. Some dividends were cut, but the sector still offers some of the biggest yields in the FTSE 100. The Anglo share price has been coming back, but the forecast dividend yield is still up at 5%.
Does the stock look attractively priced today? For investors seeking long-term dividend income, I think it does. But I see some clear cautions.
One is that the mining sector is a notoriously cyclical investment. I would definitely rule it out if I wanted short-term profits, as I’m no good at timing the ups and downs. As billionaire investor Warren Buffett famously suggested: “If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.”
Cyclical downturn?
For me, even 10 years seems a bit short term for Anglo American and other big global mining stocks. But do I think we’re in for a sustained cyclical downturn? No I don’t, for a number of reasons.
One is that we’re not seeing a supply glut. On the contrary, the global economy right now is characterised by supply-side difficulties, shortages, and rising prices. That’s in general, but commodities prices are firming up too.
Prices for metals and minerals did weaken in 2022. But since last summer, they’ve been rising again. Copper, for example, is strengthening and looks like it’s getting back in line with its five-year gains.
The situation is similar for iron ore. The price dipped in November 2022, but has been recovering since then. We’re still some way from the pandemic-boosted bubble of 2020-21. But again, the five-year trend is upwards.
China
Much of the 2022 dip was down to China. The country was sticking to its ultimately failed zero-Covid policy, with new lockdowns almost every time we switched on the news. That had a serious impact on manufacturing, with knock-on falls in commodities demand.
Now the country has all but abandoned its pandemic restrictions, China is back to business again. How will its demand progress in the coming decades? I’m not into forecasting, but I’d put good money on a steady upwards direction. I really mean that too, as I will almost certainly put some of my investment money into the mining business in 2023.
Anglo American is not just about copper and iron. It’s also expanding into lithium, which opens it to demand from the electric vehicles industry.
Risks
There are, of course, risks. I might be wrong about that cyclical thing. A year from now, the early 2023 strength might look like a blip in a downward commodities trend.
The company is also one of the world’s largest producers of steelmaking coal. And we know about the ongoing backlash against the use of fossil fuels. Still, at least the company has been offloading its thermal coal interests.
Overall, I’d say Anglo American shares are not for investors who don’t have a very long-term horizon. But its dividend yield puts it on my list of buy candidates.
