The FTSE 100 is slightly higher than it was a year ago. But not all of its constituents have fared so well.
Shares in Anglo-American (LSE:AAL) have fallen by around 38% over the last 12 months. And at today’s prices, the stock looks like a bargain to me.
Mining stocks
Part of the problem has been falling commodities prices. Lower prices for copper, iron ore, and nickel have meant less profit for the companies that extract them.
As a result, shares in the other big FTSE 100 miners have also been falling. Rio Tinto shares are down 15% and Glencore has seen its share price drop by 19%.
The last 12 months have therefore been challenging for commodities stocks across the board. But Anglo-American’s shares have clearly been affected more than those of the other miners.
This is because the company’s headwinds haven’t just been to do with the macroeconomic environment. It has had its own unique issues to deal with.
Woodsmith
Back in 2020, Anglo-American agreed to buy Woodsmith – a fertilizer production facility in Whitby – for £405m. The initial hope was to have it operational by 2021.
Since then, though, things haven’t gone according to plan. The company’s new expectation is to have the mine working by 2027.
Earlier this year, the company wrote down the value of the asset by around £1.4bn. And it now expects that getting the mine operational for 2027 will cost around £5bn.
Right now, Anglo-American has a total market value of £30bn. So this is a significant cost for the company and the reason its share price has been falling faster than its peers.
A stock to avoid?
Mostly based on the issues around Woodsmith, UBS rated the stock as a ‘sell’ back in February. But there are couple of things worth noting here.
The first is that the share price has fallen significantly since then, from around £28 to just below £23. And as a result, it’s now below the £25 price target set by UBS in its report.
Another is the company’s most recent production update was fairly positive. Production of copper, metallurgical coal, iron ore, and nickel were all higher than a year ago.
More generally, production volumes are expected to come in line with management’s predictions for 2023. So there’s definitely room for optimism when it comes to the big picture.
Risks and rewards
I think that right now could be a good time to invest in mining companies. Shares are cheaper than they were a year ago, but I’m optimistic on the outlook for commodities prices over time.
In terms of Anglo-American, I see it as higher risk with the possibility of higher reward. The business has its own operational challenges, but it has fallen further than its peers.
To my mind, the stock is a bargain. But so are a number of other opportunities in the sector, so I’ll want to look carefully at all the options before figuring out how to invest in this space.
