I’m always keen to add a cheap share or two to my portfolio and this FTSE 100 company appears to fit the bill after a disastrous year. Should I dive in?
The company in question is globally diversified mining giant Anglo American (LSE: AAL), which produces everything from gold, platinum, iron ore and copper to timber and coal, from sites all over the world.
That’s one hell of a crash
Neither size nor scale has prevented its shares from crashing a horrendous 51.35% over the last year, the worst performer on the FTSE 100.
It’s been a tough year all around for commodity stocks, as Chinese economic troubles knock demand for metals and minerals. Yet Anglo American has been hit harder than most. FTSE 100 rivals Glencore and Rio Tinto have ‘only’ fallen 27.19% and 12.41%, respectively. So what went wrong here?
The 2022 financial year was tough, with underlying EBITDA earnings plunging 30% to $14.5bn (albeit following a record 2021). The total dividend and buyback plunged 60% to $1.98. Geopolitical uncertainty, higher energy prices, falling production, global supply chain issues and extreme weather all played their part.
Last July brought more bad news, with first-half underlying EBITDA earnings crashing 41% to $5.1bn. Net debt jumped from $6.9bn at year-end 2022 to $8.8bn. CEO Duncan Wanblad pinned the company’s woes on “macro headwinds – principally, weaker prices for our products and input cost inflation”.
Commodity stocks are famously cyclical, so it makes sense to take a position when they’re down rather than up. Anglo American is incredibly cheap, trading at just 4.6 times earnings. Its current headline yield is a stunning 9.42%, but on closer inspection that’s misleading. The forecast yield for 2023 is just 4.34%, falling to 4.04% in 2024. I can already feel my interest wane.
It fades even further when I see that net debt is expected to hit $10.74bn in 2023 and $11.28bn in 2024. Things are not heading in the right direction. Commodity stocks have taken a further knock as hopes of an early interest rate cut by the US Federal Reserve recede, boosting the US dollar.
I prefer another FTSE 100 commodity stock
Anglo American’s new Quellaveco copper operation in Peru will increase its global production base by 10%, which Wanblad has highlighted as a positive. He also reckons the net zero shift will boost metals demand. But I’m worried the electric vehicle transition could hit sales of copper and platinum, both essential elements of internal combustion engines.
One thing I don’t like about commodity stocks is that they’re not masters of their own fate. The only thing they can do when prices fall is to ramp up production by digging more stuff out of the ground, a strategy that can backfire. Anglo American is doing the opposite, cutting its metals production outlook amid rising costs.
My initial excitement about this dirt cheap high yielder has faded. It faces macro headwinds and has issues of its own. I have exposure to any commodity recovery via portfolio holding Glencore and I’ll stick with that.
The Anglo American share price has fallen so far that it could snap back like a piece of elastic, but I’ll take that chance and leave it be. There are reasons it’s so cheap.
