Four reasons (or more) why you should own Anglo American

Wednesday, Nov 18 2015 by
6

Mining behemoth Anglo American (AAL) is suffering a crisis of confidence as its market capitalisation slip from being a $47.6bn business and heading towards £6bn!

In share price terms, the company was once valued at £35/share, now at a depressed £4.40/share, as we speak.

I feel this company is oversold, and you should own some in your portfolio.

Let’s begin:

1. Better asset quality

564c1cf28a1c82-1.png

Source: Annual reports of BHP, RIO + AAL.

When compared to bigger rivals like BHP and Rio Tinto, Anglo American asset turnover is no worse than the two biggest miners in the world, if not slightly better.

It’s important to have a higher asset turnover because it means these assets are generating sales relative to the value on its assets in its books.

Right now, Anglo American’s asset turnover is stabilising because the company wrote off its assets value. That means the company has ‘asset stability’ unless commodities prices decline further.

As investors, we need to see stability in businesses that we invest and not continuing deterioration in a company’s assets base.

2. Superior short-term cash vs. non-liquid assets

564c1d31254462-2.png

Source: Annual reports of BHP, RIO + AAL.

Imagine owning a barber shop and you borrowed money to renovate the place to make it assessable and comfortable for your customers. For a while, you were earning money to pay off your loan.

Then two months later, a well-known barber shop is set up near your street. People start choosing to get a haircut there instead of your place. Now you start losing your cash inflow to pay off your loan.   

The same thing is happening to the miners but in different circumstances. Instead of a steady increase in supply it became a rapid increase in supply and production.

Why?

Because most (if not all) miners bought into the ‘China will grow forever’ story. Now, China is slowing dramatically it caught the miners out as supply outstrips demand, meaning collapsing commodities prices.

One way to measure a miner’s liquidity is to divide its most illiquid assets or tangibles against its most liquid asset, cash!

The lower the multiple, the more conservative the miner is and ready to meet any short-term challenges. Anglo American is the more ‘cash conservative’ miner (see above chart).

Sometimes miners go on an acquisition spree buying overvalued assets; this creates a lot of intangibles like goodwill. But all three miners have…

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By reading my articles and newsletters, you agree to use the research of Walbrockresearch.com at your risk. The purpose of this site is to educate and entertain readers. In no way, we are giving investment advice though the information provided is to my knowledge accurate at the time of the report. You should do your research, or seek advice from qualified professional investment advisors.

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BHP Group PLC, formerly BHP Billiton Plc, is a global resources company. The Company is a producer of various commodities, including iron ore, metallurgical coal, copper and uranium. Its segments include Petroleum, Copper, Iron Ore and Coal. The Petroleum segment is engaged in the exploration, development and production of oil and gas. The Copper segment is engaged in mining of copper, silver, lead, zinc, molybdenum, uranium and gold. The Iron Ore segment is engaged in mining of iron ore. The Coal segment is engaged in mining of metallurgical coal and thermal (energy) coal. Its businesses include Minerals Australia, Minerals Americas, Petroleum and Marketing. It extracts and processes minerals, oil and gas from its production operations located primarily in Australia and the Americas. It manages product distribution through its global logistics chain, including freight and pipeline transportation. more »

LSE Price
1788.8p
Change
-0.2%
Mkt Cap (£m)
90,455
P/E (fwd)
10.9
Yield (fwd)
6.4

Rio Tinto plc is a mining and metals company. The Company's business is finding, mining and processing mineral resources. The Company's segments include Iron Ore, Aluminium, Copper & Diamonds, Energy & Minerals and Other Operations. The Company operates an iron ore business, supplying the global seaborne iron ore trade. Its Iron Ore product operations are located in the Pilbara region of Western Australia. The Aluminium business includes bauxite mines, alumina refineries and aluminum smelters. Its bauxite mines are located in Australia, Brazil and Guinea. The Copper & Diamonds segment has managed operations in Australia, Canada, Mongolia and the United States, and non-managed operations in Chile and Indonesia. The Energy & Minerals segment consists of mining, refining and marketing operations in over 10 countries, across six sectors: borates, coal, iron ore concentrate and pellets, salt, titanium dioxide and uranium. more »

LSE Price
4233p
Change
-0.4%
Mkt Cap (£m)
68,839
P/E (fwd)
8.8
Yield (fwd)
7.6

Anglo American PLC is a mining company. The Company has a portfolio of mining operations and undeveloped resources with a focus on diamonds, copper, platinum group metals (PGMs), and bulk commodities. Its segments include De Beers, Platinum Group Metals, Copper, Iron Ore, Nickel and Manganese, Coal, and Corporate and other. De Beers segment is engaged in the diamond business. Within the Platinum Group Metals segment, it has operations principally located in the Bushveld Complex in South Africa. It holds interests in two copper mines: Los Bronces and Collahuasi in Chile and is developing the Quellaveco mine in Peru. Its iron ore operations provide customers with iron content ore through assets in Brazil and South Africa. It has metallurgical coal assets in Australia, and thermal coal assets in Colombia and South Africa. more »

LSE Price
1896.4p
Change
0.7%
Mkt Cap (£m)
26,167
P/E (fwd)
8.4
Yield (fwd)
4.8



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9 Posts on this Thread show/hide all

VegPatch 23rd Nov '15 1 of 9
1

Hi OrangeTree
That's for the views. I slightly disagree as I feel that in a downturn you need the lowest cost producers, which I feel tilts the balance towards Rio Tinto.

One thing I am curious about are 2 statements you make


the first is
"I feel this company is oversold, and you should own some in your portfolio. "


and at the end of the review
"I currently don’t own shares in Anglo American as I am risk averse, and my portfolio holds one share Optibiotix Plc (bought in early this year) because the company will not be affected by ‘macro’ events. " (my emphasis in both cases)

so you are happy to recommend me buying Anglo but wouldnt do it yourself....

slightly weird IMHO

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Orangetree 25th Nov '15 2 of 9

In reply to post #112800

Hi VegPatch
Sorry for the late reply.



IMO all miners are struggling even the big names because world production of commodities is still at record levels! Only now there are talks about cutting production levels (though some miners are arrogant and still believe in the 'Chinese Dream').



Until production levels (supply) drop below the level of demand, then prices will start to stabilise.
However, this will take some time to happen.



I singled out Anglo American because it holds 85% stake in De Beers and selling it will resolve its short-term liquidity issue. 

I mentioned that Anglo is a short-term trade at between £3/share to £3.50/share. If it falls to those levels, then Anglo is oversold 'technically'.

Both Rio Tinto and BHP will need to raise cash in late 2016/early 2017, and IMO they're overvalued. 

PS. HSBC said its De Beer could be valued at $10bn, here: http://www.bloomberg.com/news/articles/2015-11-25/de-beers-ipo-could-fetch-10-billion-for-anglo-hsbc-says.

Blog: Walbrock Research
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ken lowes 6th Feb '16 3 of 9
1

Hi Greentree I'm long in AAL for far too long, but I enjoyed your article and the work you put into it. Hope you bought around the 225 level it would have made a nice pay day. Me I'm going to follow your analysis and sell at 500--maybe !

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ken lowes 6th Feb '16 4 of 9

Sorry I changed the colour of your tree. I have just looked at OPTIBIOTIX and I can't see a single reason to want to own it. I am not being funny, just curious. It would be great if you could let us into the secret?

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Richard Goodwin 6th Feb '16 5 of 9

Thanks Greentree, you have done a lot of excellent work, especially considering you don;t plan to buy!

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gus 1065 7th Feb '16 6 of 9

Hi Ken.

Re. OptiBiotix Health (LON:OPTI), I agree a cursory look at the Stockopedia metrics are not that encouraging. Momentum is pretty good (4 bagger in the last 12 months) but Q, V and SR are all pretty weak.

I defer to Orangetree who may have more in depth knowledge, but my own analysis suggests this is a classic AIM "story" with huge potential hope value. The company is developing a number of pharma type applications that promise alternative and highly effective solutions to cholesterol and weight control; two potential "Holy Grails" in human health management. Interestingly, they have gone down the route of putting this in the form of food supplements rather than prescription drugs which potentially offers a quicker and less expensive route (less extensive FDA type testing) to market. There are other applications being developed in skin and zero cal sugars which give them other strings to their bow in potentially huge markets.

The company recently announced a tie in with the makers of Slimfast products (a global leader in weight management foods) and there has been speculation about a possible tie in with P&G on cholesterol management. Management is well thought of and the company has some vocal cheerleaders in TW/ShareProphets/IC along with a reasonable level of institutional shareholder backing evidenced by a couple of recent successful equity placements. There is an Investor Presentation coming up on 16/2 at which there is speculation there may be some material news announced.

I guess it depends on whether you are a glass half full or half empty person as to whether you see these as red flags or reasons to invest. I'm not sure I would have it as my sole shareholding but I do have a small position (<1% of my portfolio) as I think there is significant potential upside from a relatively low entry point. Probably not one for the widows and orphans .....

Gus.

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ken lowes 7th Feb '16 7 of 9

Thanks Gus, I see where you are coming from, the type of share that makes millionaires or dies anonymously. I wont give it the kiss death by investing, but good luck.

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Welshborderer 30th Sep '16 8 of 9

There was a time when you could not find any positive news about Anglo American (LON:AAL), and I sold out when they were about £15 down from heights of £40+. That said the shares had not been bought at very high amounts so there was not really a loss. Your research was welcome at a time when the stock was still falling.

Having worked for one of their subsidiaries, now sold off, I have never believed that a company that is sitting on massive reserves of materials that will ultimately be in demand again can be worth as little as the valuation of one of their deep mines. Indeed that is also largely the philosophy of all the miners as they cannot possibly think short-term.

Some of their woes lay in the politics of South Africa as much as their own decisions. That said they were arguably getting themselves into projects that should have been left well alone and the recession was not identified early enough. Senior management sometimes left me a more than a little unhappy as well, but changes have taken place there.

Gradually, as they have risen, I have bought back in and now own twice as many as i sold, worth more than the proceeds I got then, and feel very optimistic backed up with negative researchers now outweighed by more optimistic ones.

Due to improved cash it is under less pressure to sell the assets identified for sale earlier this year which puts some kudos back into the hands of the company. There is an attempt being made in South Africa to change the way the company was approaching the disposals any way, and the improving situation may serve to help deter that pressure.

My only regret is not having had the confidence to buy two to three times as many when they were at their lowest.

In the interim I have invested the cash in a wide range of shares to create a balanced portfolio with a result that served to protect the investment but not materially increase it. Since selling and buying these shares I have significantly increased the portfolio value and watch carefully for any chance that may arrive of selling and re-buying at a lower level, other than that achieved with hindsight. Because of this decision I also spend very little time monitoring the share, when i had 25 it seemed a daily exercise.

It remains to be seen but this year's final figures should show some degree of improvement and signify a return to dividend next year. Maybe it is time to revisit your research?

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Orangetree 4th Oct '16 9 of 9

In reply to post #152231

Thanks for your comment Welshborderer, much appreciated.

Forgive me being a broken record, but miners are reliance on one country, that is China because they consumed 45% of all hard commodities!

Earlier in the year, China has stepped on the stimulus pedal to boost infrastructure spending and is the SOLE reason why commodities producers are still listed on the stock exchange!

However, it all depends on how much longer can China stimulate its economy before they get into trouble.

Based on my research I give China one more year because debt to GDP is too high (>350%, trust me! And it is not 250%!) Secondly, China has hundreds of cities that are only half-occupied and housebuilding is at a rate of 20m per year (minimum).

Focusing on AAL, the management knows it needs to save money as they overestimated the robustness of the Chinese economy, therefore I like their objectives to disposal businesses and cut costs. Anglo American stake in De Beers will save the company (could be $9bn alone).

Therefore, Anglo's share could see a further 10%-20% gain. But, any notion it will go back to the "hey days" of £20-£25/share is out of the question.

WARNING: If China does experience a "Hard Landing" I can see Iron Ore, Copper + Aluminium going to new lows. And this will put pressure on Anglo's share price.

O

Blog: Walbrock Research
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