3 Reasons Why Anglo American plc Is Still My Mining Pick

opencast.miningAt the start of 2014, I picked Anglo American (LSE: AAL) (NASDAQOTH: AAUKY.US) as one of my three value buys for the year ahead.

At the time, Anglo American offered a prospective yield of more than 4%, and traded at little more than its book value. Since then, the South Africa-based miner’s share price has risen by 15%, pushing its prospective yield down to around 3.5% and lifting its valuation to a 2014 forecast P/E of 14.

Despite this, I think there is more to come from Anglo, which was the last of the big FTSE 100 miners to launch a turnaround plan aimed at improving shareholder returns.

1. Tighter focus

Anglo American kicked off the week with news of a $1.5bn disposal; the miner has agreed a deal to sell its 50% stake in Lafarge Tarmac to Lafarge S.A. for a minimum of £885m ($1.5bn).

The money will be used to reduce Anglo’s debt, and by my reckoning the firm’s net gearing should drop below 30% as a result, leaving it lower than both Rio Tinto (LSE: RIO) and BHP Billiton (LSE: BLT).

My verdict? A good deal.

2. Platinum relations

Anglo recently agreed a three-year wage deal for workers at its platinum mines in South Africa, where production has been severely restricted by strike action since January.

Full production won’t resume until the fourth quarter of this year, but importantly, the deal includes an agreement that there will be no further strikes relating to any of the items covered by the new agreement, for the next three years.

3. Major earnings uplift?

Anglo’s earnings have been hit by the platinum shutdown this year, but this should reverse in 2015. Elsewhere, Anglo’s other core commodities — iron ore, copper and diamonds — are performing strongly, while its nickel unit should return to profit this year.

Although Anglo isn’t the cheapest mining share on a valuation basis, I believe it offers the best prospects for earnings growth over the next two years, something which is reflected in current consensus forecasts:

Company 2015 forecast earnings growth 2015 prospective yield 2015 forecast P/E
BHP Billiton -2% 3.9% 12.6
Rio Tinto 10% 4.1% 9.4
Anglo American 29% 3.6% 11.0

We’ll know more when Anglo’s interim results are published on 25 July, but in the meantime I’m maintaining my strong buy rating for the miner.

Buy on bad press?

Anglo’s large footprint in South Africa has meant that it has been heavily affected by industrial unrest over the last few years, creating a cloud of uncertainty that deterred some investors.

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Roland does not own shares in any company mentioned. The Motley Fool owns shares in Tesco.