A low point for miners? Why I've bought Anglo American plc

Disclosure: I own shares in BHP Billiton and Anglo American.

I’ve been watching the big mining stocks for some time, believing that at some point they will become good value buys.

I’ve owned shares in BHP Billiton for some time — and I’ve now added Anglo American plc (LON:AAL) to my portfolio.

In a recent article for the Motley Fool, I mused on the growing value appeal of Anglo American. As often happens, writing about the firm helped crystallise my thinking and prompted further research.

To save on typing, here is an extract from my research spreadsheet, which I use to build up a picture of a firm before deciding whether to invest. Based on these numbers, I believe that Anglo is getting close to the bottom:

A trailing P/E of 8.6, a PE10 of 5.9 and a P/B of 0.65 were particular appeals, as is the yield and reasonably healthy balance sheet. Net debt is expected to peak this year, after which it should fall.

Anglo still has some problems to face in restructuring its South African coal and platinum operations. However, the bigger question seems to be over the outlook for commodity prices.

In my view, demand for iron ore, coal and even platinum isn’t going to fall of a cliff. Nor are commodity prices, at least not below current levels, in my view. This is a view backed by some City heavyweights. This set of 2015-2020 commodity forecasts from a major broker (courtesy of the always excellent Value Perspective blog) is well worth a read.

It’s worth remembering that all of Anglo’s divisions delivered an operating profit last year. This company has problems, but it isn’t a basket case:

Source: Investegate/Anglo American

Why buy now?

I’ve been watching Anglo’s share price decline for a while. Why have I chosen now (well, 17 June) to buy?

There were several reasons.

Firstly, I’d had in mind a target buy price of below 1,000p. When the shares dropped to 968p, my target was hit and the price seemed fair, given the facts at hand. Anglo now trades at a severe discount to Rio and BHP in terms of P/S and P/B ratios. This should give decent upside potential if CEO Mark Cutifani can deliver a successful turnaround.

There were some less tangible reasons for my buy, too. For example, I noticed a piece titled, “Investors press Anglo American chief executive for cost cuts” in the FT on Wednesday.

Such pieces often appear in the pink pages when big cap firms are struggling to deliver the goods. They are, I believe, the result of PR pressure by big investors and often seem to precede the very improvement they are demanding.

Finally, market sentiment towards the big miners seems to be hitting a serious low. As I explained in my Motley Fool article, earnings forecasts have been slashed in recent months. As and when this sentiment starts to improve, so will these firms’ share prices. It’s worth remembering that markets always strive to be forward looking. As soon as they get a sniff of good news, it will be priced in.

Therefore for contrarian investors, the best time to buy is often when sentiment seems hopeless.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.