FTSE 100 mining giant Anglo American (LSE: AAL) has made one move in 2020 so far. It doesn’t look like a very big deal for a company of its size, yet I think it indicates big changes are under way. So what is that move?
A buyout bid for Sirius Minerals
AAL has made a bid to acquire the pre-revenue, cash-strapped would-be polyhalite miner Sirius Minerals. Whether the acquisition actually happens remains to be seen. The proposal needs a go-ahead from SXX’s shareholders, many of whom stand to lose much of their investment’s value if the deal is done. AAL’s all-cash proposal values SXX’s shares at a lower value than that which many investors paid. But they could have little choice as this seems to be the price of rescuing SXX, which will run out of funding by March.
If the deal does go through, there’s little doubt that AAL can fund it. Its annual revenue in 2018 was at $27.6bn while it had an operating profit of $6.1bn. Added to this, it reported $3.2bn in cash flow. Sirius Minerals is currently valued at £405m or $526m. The deal might be small for AAL, but I still think it’s important, because it shows a big directional shift.
Moving towards cleaner products
In its press release about the proposed Sirius Minerals acquisition it does mention this shift. Specifically, it said that the move “supports our ongoing transition towards supplying those essential metals and minerals that will meet the world’s evolving needs –in terms of the undoubted need for cleaner energy and transport”.
Coal currently contributes to 26% of Anglo American’s revenue, but evolving consumer preferences are resulting in a structural move towards cleaner and healthier choices across industries. Big oil companies are looking at alternative fuels, big tobacco is trying to transition to healthier new-generation products, and the food industry is seeing a move towards vegetarianism and veganism, which has a lower carbon footprint besides being an ‘ethical’ consumer choice.
It certainly wouldn’t harm AAL to diversify its product profile either. It expressed some concern about its diamonds business in its last trading update. Diamonds make up a big revenue source for the firm, contributing 20% of the total. As a result, AAL will feel the impact if the diamonds trade weakens either because of economic conditions or competition.
In sum, an acquisition like SXX may not immediately bring in revenues for the business, but it does indicate its tilt towards cleaner and more diversified mining alternatives. When I last wrote about Anglo American in late November, I wanted to wait for the next update before investing in the company in 2020. I was more inclined towards another FTSE 100 miner, Rio Tinto, which had seen a smaller run-up in price and its new finds put it in a good place for the future. I’m equally encouraged about AAL now, however, with this proactive initiative. Would I buy now? Yes, although I’d wait for the next results, due in less than a month, just to be sure.
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Manika Premsingh owns shares of Sirius Minerals. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.