The Anglo American (LSE: AAL) share price rose in early trade on Thursday (22 February) despite the FTSE 100 mining group revealing a 94% slump in annual profits.
These 2023 results cap a tough year for the miner, whose shares have now fallen by more than 50% from the record highs seen in early 2022.
However, I think some signs of value are starting to appear here. I like to try and buy cyclical stocks when they’re near the bottom of the cycle, so I’ve been taking a closer look to see whether this could be a good time to add Anglo American to my portfolio.
Results summary: a mixed year
A headline-grabbing 94% slump in net profit for 2023 sounds bad. But while it’s true that last year wasn’t the best for Anglo American, I think the real picture was a little more mixed than this number suggests.
Profits from copper and iron ore were fairly stable last year, but demand for platinum group metals (platinum, palladium and rhodium) and diamonds fell, hitting earnings. Coal was also down.
Anglo American also faced higher costs across its business, putting further pressure on profits.
The overall impact of these changes meant that total revenue fell by 13% to $30,652m in 2023, while underlying operating profit fell by 40% to $6,934m.
Reported profits then took a further hit, thanks to $2,652m of impairment charges. These mostly related to Anglo’s De Beers diamond business and to the Barro Alto nickel mine in Brazil.
Low diamond and nickel prices mean that future profits are now likely to be lower than previously expected. This situation might improve in the future, but for now, accounting rules require a more cautious view.
The end result is the 94% profit drop I mentioned above – Anglo American’s net profit fell to just $283m in 2023, down from $4,514m in 2022.
Unsurprisingly, the dividend was also cut. Shareholders will receive a total payout of $0.96 per share for 2023 – just under half the $1.98 per share payout made in 2022.
Challenges remain
It’s tempting to think that the worst is now over for Anglo American. Unfortunately, I can still see some potential challenges.
My biggest concern is with the group’s South African platinum group metal business, known as Amplats. Profits fell by 71% last year, and the company recently announced plans to cut over 4,000 jobs – about one in five.
One risk is that demand for palladium – used mainly in car exhausts – could suffer a long-term decline if the shift to electric vehicles accelerates.
Why I’m interested
For existing shareholders, Anglo American’s 2023 results may not feel like good news. But as a value-minded investor, I’m starting to think about buying the shares.
This business has faced challenges in the past. But Anglo has some good assets in copper and iron ore and its debt levels remain manageable, in my view.
The share price slump seen over the last two years means that the stock is now trading close to its book value of around £18 per share. I reckon that could be a value signal.
I suspect 2024 could be another difficult year, so I’m going to stay on the sidelines for now. But I’ll be keeping an eye on this situation over the coming months.
