It’s very unusual for a blue-chip stock to decline nearly 20% in one trading day. But this exactly what happened to Anglo American (LSE: AAL) on Friday (8 December).
Its share price has been underperforming its peers, including Glencore and Rio Tinto, throughout 2023. But what caused this precipitous fall, and does it present me with a buying opportunity?
Cost-slashing
In its investor update, the business outlined a series of cost-saving initiatives. This included reducing headcount and simplifying the structure of its organisation. This is expected to save $500m by the middle of next year. It’s also reducing operating expenses by $500m.
But what I really think shook investor confidence was the decision to cut its capital expenditure — or capex — budget by $1.8bn over the next three years. Lower production volumes translate into lower revenues and shareholder returns.
Challenging environment
Anglo’s mining operations have been beset by rising costs, mostly down to high and prolonged inflationary pressures.
At the same time, it has seen demand for many of its products decline. This is particularly evident in diamonds and platinum group metals.
Both these products are much closer to end consumer markets than earlier-cycle products (like copper and iron ore). Consumer spending on luxury goods has declined this year, and this has particularly hit diamond sales. As a result, De Beers, its diamond miner, has become a loss-maker.
Another major issue, evident from the analyst Q&A session, is that the market is beginning to lose confidence in its greenfield project, Woodsmith.
Woodsmith is a POLY4 mine, which Anglo believes will transform the agricultural industry, by increasing crop yields. The problem is that the project is burning through $1bn of capex each year and it’s unclear if there will ever be a market for this product.
Diamonds are a girl’s best friend
Despite all these issues outlined above, Anglo remains a very diversified mining business with a number of tier 1 assets. For the stock to have its worst one-day fall since the global financial crisis, presents a savvy long-term investor with an early Christmas present, I feel.
Take the diamond market as just one example. A problem the company has faced over the past few years has been competition from lab-grown — so-called synthetic — diamonds.
Over the past two years the price of these diamonds has plummeted 90%. But many manufacturers are heading for bankruptcy. I believe this is a boost for the company. As the dust settles, there’s likely to be a lot less confusion about the differences between these products.
What’s likely to happen, in my opinion, is that synthetic diamonds will begin moving towards being more of a fashion item. Natural diamonds, the cornerstone of De Beers, will remain what they have been for decades: symbols of the most important moments in people’s lives.
It’s also important to remember that there have been no new diamond discoveries in the last 15 years. As with so many of the other assets in Anglo’s portfolio, I foresee a future where supply is simply unable to meet demand.
The fall in Anglo’s share price over the past year is a classic example of a blood-on-the-street scenario. That’s why I’ll be buying.
