The Anglo American share price dips on Q1 production update. Time to buy?

The Anglo American share price has fallen hard in the past two years, after a very tough 2023. But I think that could be about to change.

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The Anglo American (LSE: AAL) share price was down a few percent on 23 April in early trading.

It comes after the firm posted an 11% rise in copper production in the first quarter of 2024. Anglo’s Quellaveco mine in Peru hit its its highest plant throughput rate. And two key mines in Chile both yielded higher grades.

After the morning dip, the shares were up just 5% in the past five years. But they’re way down from their highs of two years ago. So what’s the issue now?

Diamonds

It looks like the latest gloom is down to diamond production, which dropped by 23% in the quarter. It comes after a global glut in 2023, amid weaker demand.

De Beers, partly owned by Anglo, is cutting its production for the year by around 3 million carats.

The Anglo American share price is also still suffering from the firm’s ongoing drive to streamline its operations and cut costs.

CEO Duncan Wanblad said the firm is “progressing through our asset review to optimise value by simplifying and improving the overall quality of the portfolio.

He also pointed out that copper now makes up 30% of the company’s production. And I don’t think that’s a bad thing at all. It’s one of the most in-demand metals, and largely independent of fad, fashion and technology.

Forecasts

Anglo American had a disastrous 2023, with a huge fall in earnings and painful cash outflow. But forecasts suggest it could bounce back quickly, and then some.

If the analysts have it right, we could see earnings getting back to pre-slump levels in the next couple of years. And that, on today’s share price, could drop the price-to-earnings (P/E) ratio to under 10 by 2026.

The P/E can be misleading in a cyclical sector, though. But the same forecasts put the dividend back up close to 4% by 2026.

It sounds like an attractive valuation. But I have some doubts.

Safety margin

I just don’t know if there’s enough safety margin there to cover the clear risks of the next few years.

After all, that mooted 2026 dividend is pretty much bang on the overall FTSE 100 yield forecast for this year. And we’d have to wait three years to get it.

And though the P/E looks low, there are plenty of lower FTSE 100 multiples for stocks that I think are safer.

Just look at Barclays, for example, on a forecast P/E of 6.2. Or M&G with a forward dividend yield of 9.7%.

Global demand

The next few years for Anglo American will surely depend to a large extent on Chinese demand, which could go anywhere. But I do think the focus on key commodities like copper could be setting it up well for the future.

Despite my reservations, I think Anglo American could be a good one to consider buying for at least a decade. In fact, I wouldn’t buy a stock in this sector with an outlook any shorter than that.

Anglo American might make it into my Stocks and Shares ISA in 2024.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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