The FTSE 100 may be sitting near 9,000 points, but there are a number of stocks that are still in the doldrums. Since hitting an all-time high in 2022, the Anglo American (LSE: AAL) share price has fallen over a third.
The company hit the headlines last year when Australian mining giant BHP swooped to buy it. Anglo American’s board believed BHP’s bid undervalued the business. It rejected the offer and decided to back the CEO’s turnaround plan, which involved major divestments. Now that it’s a much smaller more focussed business, I’m becoming increasingly optimistic for its future.
Divestments
It had become clear that managing a motley collection of assets was diminishing shareholder value. In the last year, the business divested its nickel, steelmaking coal, and platinum group metals (PGM) businesses.
The divestment of PGMs was handled by way of a demerger rather than outright sale. A new company was spun out, Valterra Platinum, with a primary listing in Johannesburg and a secondary listing in London. Anglo American will initially retain a 19.9% holding.
The sale of its prized diamond operations, DeBeers, is proving more complicated though. The diamond market is suffering one of the worst slumps ever. Amid a cost-of-living crisis, cheaper lab-grown diamonds have decimated globald sales. This has been compounded by weak Chinese consumer confidence. I don’t expect a sale to take place until prices recover significantly.
Leaner portfolio
Once divestments are complete the business will be left with copper, iron ore, and crop nutrients. But it’s copper that excites me the most and was the primary motivation for BHP’s audacious bid.
Anglo American’s three mines, at Collahuasi, Los Bronces, and Quellaveco, generate around 3% of the world’s copper production. In total, they account for almost 6% of known global copper reserves and resources. By the end of the decade, it expects to mine a million tonnes a year.
I see copper as the new gold and expect its price to surge over the next decade. Off the back of the green revolution, the electrification agenda will create unprecedented demand. EVs, heat pumps, renewable power, and data centre growth to manage AI infrastructure are primary drivers.
Some of the numbers are simply mind blowing. In the UK alone, electricity grid infrastructure will need to expand sevenfold to meet demand over the next decade. Globally, the International Energy Agency predicts $11trn will be spent modernising grids out to 2035.
Risks
Anglo American continues to face operational challenges. Soaring costs, including labour and energy, have been eating into margins for some time. But it also faces a number of emerging risks.
The increasing strategic importance of metals, including copper, across the globe is heightening the possibility of increased regulation in the future. The imposition of additional royalties in return for mining is a possibility in a world where metal prices surge.
I am of the view that in a world of out-of-control government deficits and sticky inflation, that investors will eventually turn to hard assets. We saw that happen in 2022. I don’t think that year was a one off.
Now that the business is much more streamlined, I expect significant cost savings to emerge over time. Any investor should consider adding some of its shares as part of a balanced portfolio. I certainly have.
