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Questor: Anglo looks well placed to prosper when the economy revives. Time to buy again
Questor share tip: commodities have the potential to bounce back strongly and the firm's balance sheet is now in order
It is remarkable how fast the City has looked past the coronavirus crisis for a road to recovery. Chief executives may still be deploying survival tactics to ensure their firms make it through to the other side, but investors are on the hunt for cheap cyclical stocks they expect to bounce back when the global economy improves.
Unless the experts are far too bullish – and despite the continuing medical emergency – that might not take long. China, where the outbreak began late last year, is forecast to post a 3.7pc economic contraction in the first quarter, according to a Nikkei survey of economists last week.
However, annual growth is pencilled in at 3.3pc – which is respectable for almost any economy other than China, which accelerated by 6.1pc last year. Meanwhile Goldman Sachs believes the US will contract by 34pc in the second quarter and rally by 19pc in the third.
It is clear that some commodity prices are taking a tumble but raw materials have the potential to come back strongly. That puts the diversified miners in an interesting place. In past downturns they were exposed by their overstretched balance sheets but most have got their houses in order.
Anglo American has sloughed off $8bn (£6.5m) from its net debt pile compared with four years ago when it set out plans for a disposals programme. In order, its biggest earnings contributors last year were iron ore, platinum metals, coal and copper. Collectively they offset falling demand for De Beers diamonds.
Mark Cutifani, the group’s rough-diamond chief executive, has more recently tried to get the company on the front foot. Last month Anglo secured ownership of Sirius Minerals for a cut-price £405m, which gives it the opportunity to develop a high-grade fertiliser mine near Whitby in North Yorkshire.
The Quellaveco copper project in Peru is another prospect to watch. First production from one of the largest undeveloped copper deposits in the world is still due in 2022 despite the quarantine period slowing work.
On the supply side, all eyes are on South Africa, which accounts for 50pc of group earnings while platinum prices are so elevated. For now Anglo’s main facilities continue to operate, although at reduced capacity, which helps cash generation and smaller firms in the supply chain.
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Company followers at BofA Securities have pencilled in a 6pc decline in production at the Kumba iron ore mine and the same for platinum sites Mogalakwena and Mototolo but expect a spike in prices if economic activity snaps back.
That would be on top of the recent run caused by the lockdown because South Africa accounts for 70pc of the global platinum mined supply and 35pc of palladium.
Less attention is being given to how this crisis is affecting costs. Weak local currencies can benefit miners because a great proportion of costs are locally denominated. For example, in the past month the South African rand has fallen by 13pc against the US dollar, Anglo’s headline currency.
With oil and diesel typically accounting for 5pc-10pc of production costs and Brent crude touching 18-year lows, analysts at Jefferies, the bank, calculate a 21pc uplift in underlying earnings for Anglo this year.
At less than half one year’s earnings, the group’s net debt looks manageable. Some analysts expect Anglo to dip into reserves if this year’s dividend is not covered by cash flow. The management seems confident too: on March 20, Mr Cutifani picked up 100,000 shares.
Questor last looked at Anglo in May last year, advising readers to sell and bank a 106pc gain since we said buy in June 2017. In the past few days the shares have begun to rally but they are still more than a third lower than their January peak.
Attempting to take the road to recovery is not risk-free but, trading at less than seven times this year’s forecast earnings, Anglo is a decent way to ride it.
Questor says: buy
Ticker: AAL
Share price at close: £12.18
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