The Anglo American (LSE: AAL) share price is still up by 35% so far this year, despite would-be buyer BHP Group confirming last week that it wouldn’t make a firm offer to buy Anglo.
Instead of selling, Anglo American’s board has backed its chief executive Duncan Wanblad to complete a full restructuring of the group himself.
What’s interesting to me is that the share price is still around 20% higher than it was before BHP’s interest became public on 25 April. I expected more of a slump when the deal was called off.
But does this mean that the big miner could still be cheap today… or not? I’ve been taking a look.
What’s the plan now?
After BHP’s offer became public, Anglo released details of its own restructuring plan for its business.
In brief, Anglo is aiming to sell or separate its coal, platinum, nickel and diamond mining operations. The view among industry analysts seems to be that this could be difficult but should be doable over time.
What’s left will be a streamlined business that contains the company’s prized copper mines (BHP’s main target), its premium iron ore business and the Woodsmith fertiliser project in North Yorkshire.
Once this process is complete, Anglo CEO Wanblad expects the business to benefit from a $1.7bn reduction in costs, including $0.8bn of annual savings by the end of 2025.
A focus on copper, iron ore and fertiliser is also expected to provide much greater growth potential. Copper, in particular, is expected to see long-term demand growth from electric cars.
Is this plan a good idea?
I might be interested in owning shares in the future, streamlined Anglo American.
My question right now is whether the shares are cheap enough to reflect the risks I can see for investors during this transition period.
First of all, just completing the plan will be complicated. It could cost more than expected. The eventual financial benefits might not be as great as predicted.
Another risk I can see is that market conditions will change in the meantime. Commodity prices that are high – like copper – could weaken. Perhaps some others will improve.
Are Anglo shares cheap today?
Crunching the numbers suggests to me that Anglo shares are currently trading on about 12 times the group’s 10-year average profits.
I find this a useful metric for mining companies. It allows me to average out commodity price cycles and get a view on the long-term valuation of the business.
Twelve times average earnings may not seem much. But this is a big, mature business that needs a lot of capital when it wants to expand production or build new mines. Profits are dependent on commodity prices, which can be very volatile.
I’d prefer to pay a little less for Anglo. I’m also aware that debt levels are now quite high, and the dividend yield has fallen to under 3%.
My feeling is that the shares are probably already close to their fair value.
I could be wrong, of course. If the price of copper keeps climbing, as some investors expect, then Anglo’s profits could be stronger than expected over the next couple of years.
Personally, betting on higher prices feels a bit too speculative for me.
For now, I’ll be watching from the sidelines.
