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The FTSE 100 miner has hidden value which could soon be realised  
Thursday 12 Jul 2018 Author: Daniel Coatsworth

A cheap valuation, a decent dividend yield, a strong balance sheet and a potential corporate break-up are all reasons to snap up FTSE 100 diversified miner Anglo American (AAL).

The business has exposure to platinum group metals, iron ore, metallurgical and thermal coal, copper, nickel, and diamonds – the latter via its ownership of De Beers. It has significant operating exposure to South Africa, South America and Australia.

There is speculation that Indian group and 21% shareholder Volcan Investments wants to merge Vedanta (VED) – which it is trying to buy – with Anglo American’s South African assets and create a new mining powerhouse.

This chatter could be the catalyst for others to look at breaking up Anglo. This is the stock to own if you’re convinced we’re about to see another wave of mergers and acquisitions activity in the mining sector.

‘Anglo has world class assets in copper, coking coal, iron ore, diamonds and platinum,’ says investment bank Jefferies.

‘Other mining majors would not want Amplats (its South African platinum business) due to safety issues, and some would have antitrust issues in iron ore, but Rio Tinto (RIO), BHP Billiton (BLT), Vale and Glencore (GLEN) would surely have interest in parts of Anglo and could get involved if Anglo is in play.’

Despite nearly halving the number of assets in its portfolio over the past five years, Anglo American is still seen as a conglomerate and suffers from a discounted rating.

Jefferies’ sum-of-the-parts valuation is £23.97 which is 45% higher than the current share price.

Anglo American currently trades on an EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) metric of 4.8-times and a price-to-earnings ratio of 8.8-times based on 2018 forecasts. In comparison, BHP trades on a 6.3-times EV/EBITDA multiple and 13.6 times forecast earnings for the year to June 2019.

The trade war between the US and China is unhelpful and is a risk to consider with all mining stocks as it can negatively affect sentiment towards the sector. Nonetheless we still believe the sector is attractive longer term.

We rate Anglo American’s shares as attractive even without any takeover interest to drive up the ratings. A 4.2% prospective dividend is a sweetener to the investment case.

Productivity improvement and operational efficiencies have helped the miner reduce its costs by 26% and grow EBITDA margins by 33% since 2013. That has helped to improve cash flow, thus debt is coming down and dividends are going up.

Importantly, it also pledges to maintain capital discipline, undertaking only one major development project at a time. That suggests there won’t be a repeat of the previous commodities cycle where majors threw money left, right and centre at multiple growth projects. (DC)


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