Should I Buy Anglo American?
Nov 20th 2012 8:40AM
Updated Nov 20th 2012 8:42AM
LONDON -- It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now: Should I buy Anglo American (ISE: AAL.L) ?
Anglo, American, South African
It's Anglo, and it's American, but this mining giant is primarily South African, where it holds around 40% of its assets. Anglo American is a truly global company, with interests across Africa, Europe, North and South America, Australia, and Asia, as well as a diversified portfolio covering seven commodities: copper, iron ore, nickel, metallurgical and thermal coal, diamonds, and platinum. It has been a rocky year for mining and commodity stocks, and Anglo American has found the going tough. Its shares peaked at nearly 29 pounds in February, but it is on sale today for less than 17 pounds. That's an earth-shaking 40% discount. Should I buy it?
Diamond in the rough
Falling commodity prices and high operating costs have made this a tough year for the miners, forcing some to rein back their capital-investment programs. But Anglo American's third-quarter production report showed growth in five of the seven commodities it mines -- notably, a 14% hike in iron ore to a record 12.5 million tonnes, a 12% increase in copper production, and a 10% increase in thermal coal. Only diamond production (which fell 31%) and platinum (which was flat) disappointed. Anglo American also pocketed $2 billion by selling its 25% shareholding in Anglo American Sur and bought another 40% of DeBeers from CHL Holdings, increasing its stake to 85%.
Any share price relief was short-lived. Chief executive Cynthia Carroll was forced to step down in October under pressure from two of the company's largest investors, BlackRock and South Africa's Public Investment Corporation. The stakeholders were rattled by wildcat strike action that hit platinum production, and they worried about poor project management and operational performance. Carroll, the company's first female and non-South African executive, will work into 2013 until a successor is named, which could make for lingering uncertainty. Mining in South Africa is never easy, with Anglo American's South African operations suffering from uncertain supply of water, electricity, and skilled labor. Falling commodity prices are hurting every mining company, and cash-strapped governments are looking for new ways to ramp up tax rates and royalties. But then, whoever said running a major mining company was easy?
There are still good reasons to invest in Anglo American. Its diversified production program gives it strength and stability. Management is pursuing a progressive dividend policy, although the yield is modest at 2.8%. There has also been speculation of a potential takeover. Deutsche Bank rates it a buy, and although the bank trimmed Anglo American's target price from 26 pounds to 25.20 pounds, that makes 17 pounds look like a good entry point. The valuation isn't too demanding, trading on a price-to-earnings ratio of 11.9. The question every investor should ask is this: What do you think will happen to China? If you're bullish on emerging markets and the global economy, you might want to drill deeper into this stock.
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