Jack Jones, international mining analyst for CIBC World Markets, has rated
“We believe Anglo American has performed well against its peers, given two factors: composition and change,” Jones states in a research report. “With its exposure to diamonds, platinum and pulp — where markets are booming — Anglo American’s interim results are up over 70%, well ahead of its London peers [Rio Tinto and Billiton], which reported increases of around 35%. At the same time, the market has responded well to the company’s improved disclosure, corporate activity and management change.”
Jones proffers a “buy recommendation” for Anglo American, along with a target price of US$90. The company currently trades at about US$56 and has 395 million shares outstanding. The broadly based natural resource conglomerate generates 60% of its earnings from Africa.
On the financial front, the company posted interim earnings of US$951 for the first half of 2000, helped by strong results from diamonds, platinum and forest products. “The outlook for the remainder of the year looks good,” Jones notes, “and we see full-year earnings up 47%, with 17% growth in 2001.”
Jones notes that Anglo American improved its disclosure procedures and boosted its international exposure through acquisitions. In short, the company seems to be taking a page or two from North American majors, which are perceived as more market-savvy than their London-based counterparts.
“New Chief Executive Tony Trahar [who replaced Julian Oglivie Thompson in mid-July] sets out his objectives as delivering value from recent acquisitions, growing the core businesses organically and through acquisitions, and continuing to dispose of non-core assets,” Jones states. “Anglo American continues to look for deals to grow its international mining operations. However, the company appears to be increasingly cautious on the valuations seen in recent transactions: in August, it pulled out of a US$2-billion auction for Australian iron-ore producer North.”
At US$2.8 billion, Tarmac Aggregates was this year’s largest acquisition. However, based on recent earnings, analysts have shown little enthusiasm for the pricey deal. In Africa, the company picked up interests in the Geita and Morila gold projects and increased its exposure to Zambian copper. Coal and paper-and-packaging assets were also acquired.
“There are lingering concerns that Anglo American’s acquisition ambitions will be achieved at the expense of shareholder returns, especially given the problems at Tarmac,” Jones writes. “However, the withdrawal at North was encouraging, while the paper acquisition ratios look low, and the coal market has begun to turn. While we doubt that Anglo American has yet the deal-making reputation of Billiton, we continue to believe that it is moving in the right direction.”
Another concern is the poorly rated environment for mining stocks that has brought about persistently weak prices and low ratings. Some of this can be attributed to continued uncertainty over the economic outlook, specifically the debate over hard or soft economic landings. On a more positive note, Jones says the latter view (soft landings) appears to be dominating, which has given a boost to metal prices, including copper.
According to Jones, Anglo American’s share price reflects investor caution that the current strong markets and prices for platinum metals and diamonds can be maintained. He suggests, however, that this is a concern which he does not share. “We see little reason for major near-term instability in either market and believe that realized prices in 2001 will be above those in 2000, with little prospect of a major downside into 2002.”
The analyst also notes that what has hurt the company’s rating more than anything is its “history of low disclosure, complex structure and limited awareness of institutional shareholder requirements.” That was then. Jones believes that Anglo American has made progress in all areas since being listed in London in mid-1999.
“The structure has been considerably simplified, disclosure is now in line with the sector norm, disposals are continuing to reduce peripheral businesses, and there appears to be an awareness that acquisitions must deliver value, perhaps best seen when Anglo American walked away from North despite good strategic reasons to proceed.”
At mid-year, Anglo American’s debt stood at US$2.3 billion, which Jones describes as “amazingly low.” After taking into account recent acquisitions, year-end debt is expected to rise to US$3.3 billion, which could be offset by more dispositions.
Jones also gave a thumb’s-up to Anglo American’s renewed emphasis on cost control, a strategy that has provided operating and rating benefits to other major London-based mining groups.
“We believe that this initiative will also help reduce concerns that the Anglo American management is divorced from the business operations,” he concludes.
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