Mining stocks have generally underperformed the market, with Anglo American lagging behind its peers in recent times. Despite being one of the world’s leading diversified mining companies, Anglo American’s stock has declined by 24% over the past year, trailing larger competitors like Glencore and BHP Group. Operational challenges and difficult market conditions, particularly in key areas like diamonds where its De Beers unit incurred losses in 2023, have contributed to investor concerns and depressed share prices. A disappointing production outlook further dampened investor sentiment.
However, Anglo American’s future prospects appear promising. Rising metals prices and the company’s commitment to cost-cutting, operational improvements, and strategic reviews, including a reassessment of its businesses such as a capital-intensive fertilizer project in the UK, suggest a turnaround may be on the horizon. CEO Duncan Wanblad has indicated a willingness to explore all options, including a potential sale of the company.
Mining analyst Christopher LaFemina believes that Anglo American’s current troubles present an opportunity for investors, as the stock appears undervalued. Trading at around 11 times projected 2024 earnings, the stock is relatively cheap compared to peers. Despite recent challenges, the company’s earnings potential remains strong, particularly considering depressed prices for platinum-group metals and a weak diamond market.
Anglo American’s primary business is now copper, with most of its mining operations located outside South Africa. The company has new low-cost mines in Peru and Chile and produces around 1.2 billion pounds of copper annually. Copper, with its favorable long-term outlook driven by limited new supply and increased demand from green energy initiatives, is considered the company’s most valuable asset.
Despite the promising outlook for copper, Anglo American’s stock has not reflected its potential. Shares of Freeport-McMoRan, a pure copper play, have outperformed Anglo American, indicating that the latter is not receiving sufficient credit for its copper assets. According to LaFemina, Anglo American is the best diversified miner to invest in for exposure to copper, which he estimates accounts for about 40% of the company’s net asset value.
Anglo American faces criticism for its heavy exposure to South Africa, where it owns significant stakes in Anglo American Platinum and Kumba Iron Ore. Some suggest spinning off these assets to shareholders due to economic challenges, crime, and power outages in the region.
The diamond business, largely operated by De Beers in southern Africa, suffered from weakening demand, particularly in key markets like China, as well as competition from lab-made stones. Analyst Christopher LaFemina sees potential for recovery in both diamonds and platinum-group metals, with recent signs of improvement in diamond sales and palladium prices.
However, operational challenges persist. Anglo American’s net debt increased by nearly $4 billion to $10.6 billion last year. It could face a cash burn of nearly $1 billion in 2024, partly due to significant capital expenditure on a large underground fertilizer project in northern England, expected to come online by 2027. Analysts express skepticism about this project’s high cost and uncertain returns, but success in finding a partner to share costs could be seen as a positive development.
Morgan Stanley’s Alain Gabriel recently upgraded Anglo American, citing a portfolio review and potential operational enhancements. His price target suggests modest upside potential, but he values the company’s assets at around $16 per share.
In summary, Anglo American offers shareholders two potential paths to success: improving its business operations independently or becoming an acquisition target for a larger mining company attracted to its valuable resource base.