Anglo American: Done With Diversification

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Anglo American has a successful track record of mining operations all across the world sustainably and safely.China's economic stimulus could boost demand and prices for Anglo American's key metals, ...

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A stalwart in the industry, they have mining assets in copper, PGMs, iron ore, and other precious metals and diamonds. At today's reasonable valuation, I think recent China stimulus news can prop up prices of iron ore, copper, and PGMs, which can potentially fuel stronger fundamentals for Anglo American. Also, their simplification strategy to focus on just copper and iron seems to be a smart and compelling trade-off. Thus, I'm initiating a buy rating for Anglo American stock due to its successful mining track record, higher anticipated metal prices, and long-term strategic shift to a more focused business. Company Overview Anglo American is a leading mining company with operations all around the world. They have a \"world-class portfolio of mining and processing operations\", specifically towards metals like copper, iron ore, PGMs, nickel, and other metals. With over $30 billion in revenue for 2023, this is a major industry leader in the mining space that is well diversified and has a successful track record of safety and sustainable mining. For 2023, about 72% of adjusted EBITDA came from copper and iron ore, according to their annual report. Investors can see that although they are diversified, for the FY 2023 most of the results were concentrated on these two metals. Going forward, the simplification strategy to just focus on copper and premium iron ore is likely to dominate the future story, so investors can anticipate a more focused business that has more volatile fundamentals. As a major contributor to emissions, Anglo American has pursued sustainable mining practices in order to \"to reduce greenhouse gas emissions by 30%; achieve a 50% reduction in fresh water abstraction in water scarce areas\" and \"planning to be carbon-neutral across our operations by 2040\" according to the 2023 sustainability report. By using technology, their FutureSmart Mining approach is arguably effective in increasing both the efficiency and sustainability of their mining operations. Annual Report 2023Overall, I think that going forward, the fundamentals may improve as China stimulus met with recent cost-cutting measures can increase profitability. 2023 was a tough year for the business, as many of the PGMs and diamonds saw a significant decline in price. With negative free cash flow for 2023, management sought to decrease capex over the course of 2024, potentially setting up free cash flow to turn positive in the near future. As a result, I think the fundamentals have bottomed for Anglo American and expect a solid rebound in free cash flow and the stock price. China Stimulus May Increase Metal Prices China is a major consumer of iron ore, platinum, copper, and other construction metals. Consequently, when China slows, demand for these metals follows. Now that Chinese officials want to stimulate their economy, this may stimulate demand and increase prices of iron ore, PGMs, and other construction components that China uses to build its infrastructure and overall economy. Recent news suggest that iron ore is already seeing a rally. As a major producer of iron ore, Anglo American is poised to benefit from increased iron ore demand from China. Trading EconomicsFurthermore, China's automotive sector is heavily reliant on copper, platinum, and may see a boost in production as the Chinese economy recovers. According to one source, The global market for platinum, a precious metal widely used in various industries, is poised for a potential surge. One significant driver of this anticipated growth is the increasing demand for platinum in heavy-duty autocatalysts, particularly in China. If China wakes their economy up, demand for many of Anglo American's products will likely increase, contributing to better profits and sales for the business. The bottom line is that I see the potential rebound in China to be a major benefit to miners such as Anglo American as China reignites their demand for iron ore and platinum, using it to build infrastructure, automobiles, and properties. Recent weak financials forced management to cut costs. According to the investor presentation, \"~$1.8bn of sustainable costs savings on track to be delivered\" for FY 2024. As the group basket price of metals declined 10% in the first half of 2024, management's cost profile and efficiency were subsequently improved. This poises Anglo American in a strong spot to profit from a potential upturn stemming from China's recovery, so I think the fundamentals may dramatically improve going into next year. Long-Term Simplification Strategy Is Smart Although right now, the company is well diversified in PGMs, nickel, diamonds and many other metals, management has expressed their intention to simplify their business down to just copper and iron ore. This slow and gradual transition is expected to finish by 2030, at which the business will look more focused and concentrated. Investor PresentationGiven that iron ore and copper already dominate most of the financials, I expect the future transition to concentrate on these two to be a smart and positive trade-off. Copper is becoming more and more important in the global economy as it is used for construction, electric vehicles, and renewable energy. Some sources suggest that copper demand will double due to AI applications, and potentially be in shortage in the long term. Nonetheless, management is smart to bet big on copper to amplify the returns to shareholders. On the other hand, management describes their iron ore as high-grade, which may fetch a premium in the market. According to the transcript,  We will have a premium iron ore business that, through the cycle, should be a fantastic cash generator with a material production uplift potential from our Serpentina deposit. Turning to iron ore. The new Anglo American portfolio has an outstanding premium iron ore business. Our Minas-Rio mine produces some of the highest quality DRI in the industry, while the Kumba products, particularly its lump, enable more carbon-efficient transitional steelmaking processes. As the global steel industry decarbonises, we expect to see even more significant premiums emerging for these types of products.  It seems like management is done with diworsification. By focusing on their strengths, I believe the future financials will look a lot better as copper and iron ore are in higher demand. The uses for these two are endless, mostly driven by a recovering Chinese economy. By divesting and simplifying their portfolio, this looks to me a positive trade-off that will amplify the returns and earnings for investors. Valuation - $45 Fair Value I think revenues can stay at around $30 billion over the next few years, as higher metal prices and divesting low return mining assets can maintain revenues and increase EBITDA margins. Also, their simplified business should be a higher return, higher margin business as they only focus on top products that the world really needs. Assuming the EBITDA margin comes in at 40%, which is higher than the 2023 number of 33%, I think EBITDA will come in annually at $12 billion. Apply a forward EBITDA multiple of 5.5x, which is below the sector median of 9x, gets me $66 billion in EV. Subtract net debt of $11 billion gets me $55 billion in market cap. Divide by shares outstanding of 1.2 billion gets me $45 fair value per share. The simplification strategy should yield a higher margin business as they only focus on top products that the world really needs. By leaning into copper and iron and scaling up, they can effectively become a low-cost producer, which leads me to believe their EBITDA margins can increase. All around, this company is on the verge of a long-term transformation that should reward patient investors. Risks Simplifying the business does have some negative trade-offs, as it concentrates the business to exclusively copper and iron ore. This means that financials may experience increased volatility due to fluctuations in iron ore and copper prices. I think the long-term trade-off is a positive, but that means investors may have to stomach bigger performance swings as the business is more vulnerable to copper and iron ore price movements. China may not come back, and the iron ore rally may be short-lived. Part of the thesis does depend on China, as China is a major consumer of both copper and iron ore for their economy. If China continues to be weak, enters geopolitical tensions, or engages in trade-wars with countries, it could affect how much iron ore/copper China is willing to import in the global market. The simplification strategy may take too long to execute. In that case, my optimistic assumptions may take a while to materialize, giving investors a bad return over too long a time frame. So, management's execution of simplifying the business swiftly plays into how long this transformation will take. Buy Anglo American I think simple is better. The company is done with diversification, and has learned to get rid of certain parts of their business that are low growth, low margin. The market does not seem to have caught on yet, giving investors the opportunity to buy into this transformation story. Copper and iron ore are good bets to concentrate on, so the overall business should have higher EBITDA margins and higher free cash flow, leading to a potential positive revaluation of the stock.    Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2475387077"}