Stock Focus: Anglo American (AGL)

Anglo American PLC (Anglo American) is one of the worlds largest diversified mining companies. It’s portfolio includes bulk commodities, which consist of iron and manganese, metallurgical and thermal coal; base metals, which consist of copper, nickel and niobium; precious metals and minerals, which include platinum and diamonds. The company operates in Africa, Brazil, Chile, North and South America, Australia, China, India, Japan and Europe.

History

1917
Sir Ernest Oppenheimer founds Anglo American. He’d foreseen the potential to invest in gold mining on the East Rand in South Africa and raised £1 million of capital from sources in Britain and the United States, hence the company name. His aim, which remains true today, was to make profits for its stakeholders in a way that makes a real and lasting contribution to the communities where it operate.

1926
Anglo American becomes the largest single shareholder of the now famous South African diamond company De Beers.

1928
The company begins negotiations with Dr Hans Merensky, a German geologist who discovered the reef of platinum ores that today makes us the world’s largest platinum producer.

1936
Anglo American begins researching uses for low-grade diamonds, making a first step towards the revolution of synthetic diamond manufacturing.

1947
A New York copywriter for De Beers coins the phrase “A diamond is forever”. It is to become one of the most successful advertising slogans ever.

1957
Sir Ernest Oppenheimer dies. His son Harry succeeds him as chairman of De Beers and Anglo American

1961
The company invests in the Hudson Bay Mining and Smelting Company in Canada, it’s first major venture beyond southern Africa.

1967
Anglo American enters the steel industry by acquiring Scaw Metals and, by establishing the Mondi Group, they take a position in the timber, pulp and paper industry.

1969
De Beers Botswana Mining Company (Debswana) is incorporated as a joint venture between the government of Botswana and De Beers.

1973
The company opens its first office in Rio de Janeiro, Brazil.

1974
Anglo American pioneers the first professionally managed corporate social investment fund in South Africa: the Anglo American Chairman’s Fund.

1975
The company brings together its eight South African coal mines into Amcoal (later Anglo Coal), helping South Africa become a major coal exporter.

1980
Anglo American begins to build its presence in Chile, through Empresa Minera Mantos Blancos.

1989
Anglo American creates Zimele, one of the world’s most successful corporate enterprise development programmes in South Africa.

1994

The company begins the biggest black empowerment deal in South African corporate history, splitting Johannesburg Consolidated Investment (JCI) to create new black-owned companies.

1995
Anglo American opens the Mantoverde copper mine in Chile. They secure its first coal assets in Latin America.

1998
AngloGold (now AngloGold Ashanti) is formed from the separately listed gold companies in which Anglo American had interests.

1999
Anglo American merges with Minorco to form Anglo American plc, listed on the London Stock Exchange and with a secondary listing in Johannesburg.

2000
The company acquires Shell’s coal assets in Australia, with significant interests in four underground and three open cut mines at five locations: Callide, Capcoal, Moranbah North, Drayton and Dartbrook.

2002
The company acquires the Los Bronces and El Soldado copper mines and the Chagres smelter in Chile, becoming the country’s third largest copper producer.

2002
Anglo American acquires a major stake in Kumba Resources South Africa, building its position in iron ore. In 2006, Kumba is restructured, becoming Kumba Iron Ore, in which they own 70%.

2006
Following the success of its Zimele enterprise development scheme, Anglo American launches the Emerge programme in Chile to support small and medium sized businesses.

2007
Opening of the eMalahleni Water Treatment Plant, a project it has championed, which converts mine water into drinking water.

2007
Anglo American makes an initial investment in the Minas-Rio iron ore project in Brazil, subsequently acquiring a 100% interest and a 50% interest in the dedicated export facility.

2008
It wins ‘new order’ mining rights in South African, recognising its progress on black economic empowerment.

2008
Anglo American extends its world-leading workplace treatment programme for people infected with HIV/AIDS to cover dependants of employees.

2008
The company leads a safety summit for employers and workers in the South African mining industry, helping achieve a breakthrough in safety standards.

2008
De Beers opens its first two mines outside Africa, Snap Lake and Victor mines in Canada.

MarkCutifaniCEO
Mark Cutifani – Chief Executive Officer

2012
Anglo American increases its stake in De Beers to 85%, by acquiring the Oppenheimer family’s 40% interest. The Government of the Republic of Botswana – AGLs partners – retain their 15% shareholding.

2014
The Minas-Rio iron ore operation in Brazil comes on stream with the first shipment from the port of Açu.

Prospects: Where is the growth potential?

1. A recovery in commodity prices

While you need to go and read risk number one this is the other side of the coin. Forecasting commodity prices is notoriously difficult as the markets are fairly efficient. If we see a recovery in base and precious metal prices, all high beta resource stocks will turn and run.

Risks

Risk #1: Commodity prices remain subdued

Most global diversified miners saw the recent China lead commodity boom as a cash cow that needed milking. They increased production levels dramatically to take advantage but thanks to the long lead times in mining production ramp ups, by the time all this new production was coming on stream, the Chinese thirst for commodities had been slaked.  The whole industry is now facing far lower prices thanks to the “double whammy” of decreasing demand in the face of increasing supply.

Risk #2: High debt-levels are triggering asset sales

Asset sales: Anglo has a relatively high debt level and is currently focussing on selling assets; in a research note, Standard Bank writes, that there could be up to 15 assets that will be sold (in addition to the announced sales of Union, Rustenburg, Tarmac Lafarge and some smaller Chilean copper operations). Thus they think there is limited potential for capital returns above the dividend but that asset sales will be used to shore up the balance sheet.

Risk #3: Mining inflation costs

The South African mining situation is anything but stable. De Beers managed to keep it’s mining cost inflation in check but other units like Anglo Platinum were affected last year by one of the longest strikes in recent history. The labour situation in South Africa remains troubling.

In-depth focus: De Beers

De Beers contributes 28% towards Anglo Americans profitability. It’s a very important to the overall group especially as their other divisions. It was the second best performing division.

In 2012 Anglo American  increased its stake in De Beers to 85%, by acquiring the Oppenheimer family’s 40% interest. The Government of the Republic of Botswana – Anglo American’s partners – retain their 15% shareholding.

Through De Beers and its partners Anglo American produce about a third of the world’s rough diamonds by value, employing more than 20,000 people around the world.

It sells rough diamonds to world-leading diamantaires through its Sightholder sales and auction sales operations.

It also markets polished diamonds through our Forevermark brand and sell finished pieces through De Beers Diamond Jewellers.

In addition, it designs, develops and produces industrial diamond supermaterials through our Element Six business.

Production sites

Philippe Mellier - De Beers Chief Executive Officer since May 2011 Qualifications: MSc (Mechanical Engineering), MBA Age: 59  Philippe joined Ford in 1980, occupying senior positions over 19 years. In 1999, Philippe joined Renault as a senior vice president. In 2001, he became chairman of Volvo AB and CEO of Renault Trucks. In 2003, he became president of Alstom Transport and was later appointed executive vice president of Alstom Group.
Philippe Mellier – De Beers Chief Executive Officer since May 2011 Qualifications: MSc (Mechanical Engineering), MBA Age: 59 Philippe joined Ford in 1980, occupying senior positions over 19 years. In 1999, Philippe joined Renault as a senior vice president. In 2001, he became chairman of Volvo AB and CEO of Renault Trucks. In 2003, he became president of Alstom Transport and was later appointed executive vice president of Alstom Group.

Anglo American primarily operates Southern Africa diamond mines but, in 2008, added two new Canadian mines: Snap Lake and Victor.

The companies diamond mines are located in four countries: Botswana, Canada, Namibia and South Africa.

In Botswana, it works in partnership with the GRB through its 50:50 mining joint venture, Debswana, with operations including Jwaneng, one of the world’s richest diamond mines.

In Namibia, De Beers operates in partnership with the Government of the Republic of Namibia through Namdeb onshore and offshore through Debmarine Namibia.

In South Africa, De Beers’ mining takes place through De Beers Consolidated Mines (DBCM) in which its partner, Ponahalo Holdings, has a 26% shareholding. The majority of its South African production comes from Venetia mine, with the balance from Voorspoed and Kimberley mines.

Growth prospects

In the latest results CEO, Philippe Mellier, saw strongly supportive demand coming from the US and from China. India, which has been flatter for the last three years was also highlighted as one of his most exciting growth opportunities.

Production levels were also in line with expectations.

Both the polished and rough diamond market was weaker in Q4 2014 and Q1 2015.

Two big new projects are being added to sustain production.  These will still take 7 years to ramp up to full development.

  • Venetia underground project in South Africa.
  • Gahcho Kué Project in Canda

We should see the gap between supply and demand should widen in 2018/2019. This should play into De Beers ramp up plan, we can only imagine that they would approach any scale up in production cautiously after what can only be described as overcapacity disasters in other commodity vertices.

Technology is improving

Technology will play an important role as manufacturing jewellers manage to achieve a higher polished production yield with the same rough diamond input. That said, there is a forecast reduction in supply of rough stones, and with demand forecast to increase, prices should remain firm.

Retail footprint is growing quickly

Forevermark is growing very quickly. Now present in 34 countries (1500 stores) whereas 5 years ago there was nothing. China is still the biggest market for Forever Mark but the US is catching up quickly. De Beers is partnered with LVMH.

Cheap oil is great for De Beers

Lower fuel prices should help with it’s cost base but also help increase the position of US and Chinese consumers.

The stronger dollar is good for De Beers

Diamonds are  sold in dollars (and thus revenue is reported in dollars), but most of De Beers costs generated in other countries. In the most recent set of results there was a dramatic weakening in most other currencies against the dollar and this has buoyed profitability.

  • Sales $7.1bn  (+11%)
  • Rough diamond sales $6.5bn (+12%)
  • Operating profit was up +36%
  • Production up 5% to 32.6 million carats

Risks

Undisclosed synthetics

De Beers has spent a huge amount on better detection equipment to differentiate between natural a synthetic diamonds.

Weaker Japan

Japanese sales tax and a far weaker currency will hamper dollar revenue.

Source: Anglo American Integrated Report and Website