The world’s shift to renewable energy and electric vehicles is going to require a lot of metals, and one of the best ways to profit from this could well be through FTSE 100 miner Anglo American (AAL).

The mining giant has exposure to an exciting mix of commodities including those currently soaring at the moment – iron ore and platinum group metals – and those with what look likely to be very strong futures such as copper, nickel and manganese.

It also has the Woodsmith potash project in Yorkshire, acquired after buying Sirius Minerals in March last year, which although is a long way off from production could also become a significant revenue generator.

Anglo currently makes more money from iron ore than any other commodity, accounting for 46.5% of its underlying earnings in 2020. Its earnings aren’t overly exposed to iron ore however, unlike rivals Rio Tinto (RIO), which derived 76% of its underlying earnings for 2020 from iron ore, and BHP (BHP) which made 55% of its earnings from iron ore in the six months to 31 December.

STRONG FUTURE EARNINGS GROWTH

Anglo’s shares have already   gone up markedly since the iron ore boom started in November 2020, but the scope for continued strong future earnings growth is clear thanks to what could be huge structural demand for commodities including copper, nickel and manganese, metals key for electric vehicles and, in the case of copper and nickel, renewable energy infrastructure including solar panels and wind turbines.

It has a major new copper mine in Peru that is expected to begin production next year, something that should provide a significant tailwind for earnings if analyst estimates of a 60% rise in the copper price by 2025 prove to be correct.

The miner trades on a price-to-book value of 2.3 times, which is admittedly on the more expensive side, but this is still lower than the 2.9 times Rio Tinto trades on and the 3.2 times level BHP, the world’s largest miner, is trading at.

Given it has the same exposure to structural growth commodities as its peers, and none of the ESG issues which have plagued Rio Tinto, the shares look attractively valued on a relative basis.

ESG POSITIVE

One plus point Anglo American has over its London-listed peers from that all-important ESG angle is the disposal of its assets in thermal coal, the ‘dirty’ kind used for energy unlike metallurgical coal which is a key ingredient in steelmaking.

Its coal assets will be transferred to a separate company called Thungela, which will be listed in London and Johannesburg, and Anglo American shareholders will be awarded one new Thungela share for every 10 Anglo shares they currently hold, essentially meaning investors will be given free shares in a new business.

Anglo is also a solid option for someone looking for income with a forecast 5.5% dividend yield for 2021 with a dividend cover of 2.5 times.

Most of the big diversified miners have enormous levels of cash generation and Anglo American is no different with cash flows from operations of almost $8 billion and attributable free cash flow of $1.2 billion.

RISKS TO CONSIDER

One of the risks with Anglo, like with any large diversified miner, is that share price can move in line with certain commodities, the prices of which can be volatile and go and up down depending on current macroeconomic conditions, so the stock could be better suited for someone with at least a five-year time horizon who is willing to ride out the bumps that come with commodity markets.

One other risk worth mentioning is that through its   De Beers unit Anglo American is also the biggest player in the global diamond market, which isn’t as positive as it sounds given the diamond market is in a structural decline and is something that could potentially weigh on the company’s earnings in the next few years.

Despite these risks, the company has a lot going for it. It has a strong balance sheet, which includes net debt to EBITDA of just 0.6 times, and given its fixed costs is set to benefit from the cyclical upswing in commodities as economies recover from the pandemic, while it also has a rising exposure to the commodities with the most attractive structural  growth profiles.

Analysts have pointed out that with the yield curve steepening and multi-year deficits forecast in key commodity markets, investor preference in mining is likely to shift away from dividend yield and free cash flow – though two areas Anglo does perform strongly, it must be said – towards focusing on the quality of growth in commodities with structural upward trajectories. This should help ensure Anglo American remains an investor favourite for many years to come.

‹ Previous2021-04-29Next ›