A tunnel in a deep mine

Is the Anglo American rebound too good to be true?

A tunnel in a deep mineDisclosure: I own shares of Anglo American.

My original investment in Anglo American was far too early. My second purchase — at 369p — was a better effort, although still some way off the bottom.

By early January, things were looking pretty grim. I didn’t have enough cash in my portfolio to average down again so sat tight and endured the 215p low. What I didn’t expect was for such a rapid rebound to follow.

Anglo shares are now up by 77% so far this year. Today’s closing price of 533p means that the loss on my overall position has been reduced from more than 50% in January to just 14%.

To be honest, I’m a bit worried. There has been some good news — which I’ll review in a moment — but is this rally really sustainable? Anglo now trades on 17 times 2017 forecast earnings, despite offering no dividend. The group still faces a challenging set of asset disposals. I mean, buyers are not exactly fighting for the chance to buy coal and iron ore mines, are they?

Having said that, the first two months of 2016 have delivered some good news:

  • Diamond sales are improving: The DeBeers business was one of Anglo’s top profit generators in 2014. The downturn in this business last year was painful and prompted quite rapid action by the firm. This now seems to be paying off. In a new spirit of transparency, Anglo has started publishing sales totals from DeBeers sightholder sales. The last sale (of 10) in 2015 generated sales of $248m. So far in 2016 there have been two sales, which have generated $545m and $610m.
  • Action on debt: Anglo’s decision to use some of its $14.8bn of liquidity to buy back $1.3bn of its own bonds at a discount to their face value was well received by the market. Anglo is planning to reduce net debt from $12.9bn to about $10bn by the end of 2016. The bonds being bought back all mature in 2016, 2017 or 2018. Reducing short-term debt will push out Anglo’s debt maturity profile, improving near-term cash flow and strengthening the balance sheet.
  • Platinum & Copper: the spot price of platinum has risen by 5% so far this year to $944/oz. It’s well off the January lows of $811/oz. A weaker dollar is also helping many emerging market miners. Copper prices are also substantially higher.
  • Restructuring Anglo: Focusing on Anglo’s three strongest commodities — platinum, diamonds and copper — makes sense. Disposing of the firm’s second-tier assets will improve profit margins, cash flow and resilience to future downturns. Along with the debt buyback, this plan will also make the group a more attractive buyout target — something some analysts believe is at the heart of Mark Cutifani’s plans for the firm.

I’m reasonably confident that Anglo’s turnaround plan will bear fruit. However, it’s not yet clear (to me, anyway) how much money Anglo can reasonably expect to raise from its disposals. This will impact on the ability of the firm to reduce debt.

I intend to hold for the time being, although I wouldn’t be surprised to see a pullback of some kind over the next few months.

Disclaimer: This article represents the author’s personal opinion only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

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