2016 in review: Anglo American plc

2016 has been an action-packed year for shareholders of Anglo American (LSE: AAL). The mining group’s share price has rocketed from an all-time low of 215p in January, to a 52-week high of 1,283p. That’s pretty remarkable for a FTSE 100 stock.

As things stand, shareholders are likely to end the year with a holding that’s worth 275% more than it was on January 4. In this special year-end review article, I’ll outline three reasons for this impressive recovery, and question whether the shares remain a buy.

Commodity rebound

Coal and iron ore prices rebounded faster and further than anyone expected in 2016. The price of coking coal — which is used to make steel — has risen by about 225% so far this year. Thermal coal, which is used in power stations, has doubled in price. Iron ore has risen by about 75%.

Why did this happen? After a five-year decline in the price of coal and iron ore, supplies were starting to fall. Inventory levels also started to get low. The market balance swung from buyers to sellers, who were able to charge higher prices.

This potential recovery wasn’t reflected in Anglo American’s share price at the start of 2016. Investors believed the group’s high debt levels would force the company to raise fresh cash from shareholders. As a result, the shares were priced at distressed levels.

In January, chief executive Mark Cutifani unveiled a bold restructuring plan that would have seen the firm sell most of its coal and iron ore assets. His aim was to focus on Anglo’s more profitable diamond, copper and platinum mining operations.

Ironically, these commodities haven’t performed as strongly in 2016. Copper is up by 20% this year, but only started to rise in November. Platinum has only risen by 3% so far this year.

Plans to sell coal and iron ore assets have now been put on hold. The group is now running these mines to generate cash and reduce debt levels. Many of Anglo’s mines now look more profitable then they have done for several years.

Currency boost

The UK’s shock Brexit vote in June resulted in a sharp fall in the value of the pound. Before the referendum, a pound was worth about $1.45. Today, it’s less than $1.25. Virtually all commodity stocks report their earnings in US dollars, so the value of their UK-traded shares rose quickly.

Anglo American was no exception. The group is currently forecast to generate earnings of $1.26 per share in 2016. At current exchange rates, that’s equivalent to 102p per share. At the start of June, the same dollar earnings would have been worth 86p per share.

Mr Market is happy again

The final factor that’s influenced Anglo’s share price is market sentiment. Back in January, sentiment was heavily against the mining sector. Stocks were being sold at any price, without any thought for the future.

Twelve months later, City sentiment towards mining stocks has undergone a reversal. Big institutions are buying again.

The shares look set to end the year with a 2016 forecast P/E of 11.3, and a 2017 forecast P/E of 7.8. That looks like good value to me, although it’s worth remembering that the tailwinds we’ve seen in 2016 could reverse in 2017.

2017's top bargain?

I'll be publishing a special 2017 preview article for Anglo American investors at the start of January.

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Roland Head owns shares of Anglo American. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.