Changing political landscape beneficial for the future of Anglo American


December 3, 2018 12:30 pm

Amelia Morgenrood.
JOHANNESBURG – As recently as October the share price of Anglo American reached R335, but lost 17percent in the last eight weeks. The resource index lost a similar percentage over this time.

Last week Mark Cutifani confirmed the $6billion (R83bn) South African investment Anglo recently committed to be making at the investment summit. He reiterated that this investment was “at risk” if the trajectory the country was on, particularly around the charter, continued.

The land debate, and finding a sensible solution, was the most asked question about the company’s investments in South Africa by investors around the world. They are not comfortable about the impact it could have on the company’s mines in the future.

It has the best potential of all the major mining companies to grow internally. This is driven principally by the development of Peruvian copper mine Quellaveco.

Copper is an essential metal in the world now and is predicted to be one of the critical metals of the future as well. The copper segment should eventually become the biggest in Anglo American, dethroning coal which dominates for the moment.

The platinum group metals’ (PGMs’) outlook stays blurry, given the progression of electronic vehicles, but indications are that it is going much slower than initially anticipated. The much higher prices of Palladium and Rhodium pushed the PGM basket into record rand price territory.

One-third of the planned $6bn spent will be on underground deposits at Venetia – the most significant capital investment in a diamond mine in decades. They intend to invest the balance in iron ore, manganese and coal.

Diversification means lower risk in mining companies, and Anglo is now as diversified as one can ask for, with no single commodity representing more than 33percent of their operating profit.

Anglo used to trade on a par with international peers up until 2015 when the market corrected. Today the share is trading at a significant discount to companies like Rio Tinto and BHP Billiton, and there is the potential of a re-rating.

Cash flow is still not what it should be, but given the vast restructuring process the company underwent, it might soon change.

Another reason for the discount is the political situation, and with positive political changes in South Africa, there is no reason for the discount to persist.

There is no apparent near-term catalyst for the share price to move, but the results will be released in mid-February 2019, and that might be what the doctor ordered.

We could be surprised if the robustness of the company’s business model starts coming through and possibly set into motion the long-awaited re-rating.

A stronger rand can, however, cancel out this prospect.

Thanks to the positive developments on the political landscape in the past year, companies are prepared to look at investments again. However, they want the assurance that it will work out well for their shareholders. If this can happen, the future is shiny for Anglo American.

Mining in South Africa is just a shadow of what it used to be, and I am a sure our government would love to bring it back to life.

Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. Anglo American shares are held on behalf of clients.

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