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I was dead wrong about Anglo American plc

Back in the depths of the commodity crises in January of last year I warned that Anglo American (LSE: AAL) shares hadn’t yet bottomed out at their then price of 232p. I reckoned that the miner’s horrific balance sheet, cash-bleeding operations, high costs and plunging commodity prices would make for a very poor 2016.

Oh, how wrong I was. Commodity prices rebounded slightly, the company sold off non-core assets to repair its balance sheet and investor confidence sent shares rocketing to their current price of 1,204p.

Of course, I can’t go back in time and buy the shares, but I can reassess the business as it stands today and try to better predict where its going in the future. And while it’s virtually impossible to estimate commodity price movement in the short term, it is becoming increasingly likely that the miner is in for a major, beneficial, shake-up.

This is because news broke last week that the billionaire owner of Vedanta Resources, Anil Agarwal, is looking to buy a 12% stake in Anglo American. This would make Agarwal the company’s second largest shareholder and suggests to me that he is either expecting a spin-off of South African assets that are weighing down Anglo’s valuation, or reckons he can combine the rest of the company’s assets with Vedanta to create a globe-spanning mining giant.

Either way, current shareholders are likely to benefit as divesting South African assets would cut operating costs and substantially improve the company’s balance sheet, allowing for an earlier-than-expected return to dividend payouts. And combining with Vedanta would also improve the group’s balance sheet and significantly increase overall profitability.

With Anglo’s shares still looking cheap at 6.6 times forward earnings and a potential change of strategy on the cards, I’m much more bullish on the company than I was this time last year.

Some consolation 

While I was wrong about Anglo American back then, one stock I was right about was Rolls-Royce (LSE: RR). Shares of the engine maker are up by over 33% since December 2015 when I said that new CEO Warren East’s plan to slash a bloated management culture and improve margins by moving many production tasks internally would pay off big time.

While the market is responding well to the company’s plan, things aren’t entirely rosy for Rolls. The company last reported a whopping 49% year-on-year fall in underlying pre-tax profits as each of its divisions struggled mightily.

But that doesn’t mean it’s all doom and gloom going forward. East’s cost-cutting plan has already trimmed £60m in annual costs in 2016 and is expected to deliver £200m in annual savings by the end of 2017. And the group’s core civil aerospace division should return to bumper profitability in the coming quarters as its new line of engines enters service, which brings hugely profitable maintenance contracts that last for decades.

Although the company’s shares are looking pricey at 23 times forward earnings, I still believe shareholders will be richly rewarded in the long term thanks to the firm’s global duopoly in engines for wide-body jets and significant room for margin and dividend improvement.

But while Rolls-Royce has great defensive characteristics it wasn’t as impressive as the five defensive giants that were named the Motley Fool’s Five Shares To Retire On. Each of these companies has massive moats to entry for competitors, enviable pricing power and dividends to match.

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Ian Pierce has no position in any shares mentioned. 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.