Since reaching a high of 4,292p in April 2022,  Anglo American Plc (LON:AAL) shares have turned southward. The stock has plunged over 35% this year. This notwithstanding, the firm continues to trade at a P/E ratio of around 16, which is a little above the market average.

So, does this present a decent investment opportunity for my portfolio?

Key Points 

• The Los Bronces open pit expansion and underground development environmental permit was approved on 17 April 2023. 
• The Anglo American share price is been down over 35% year to date. 
• An ongoing Woodsmith project in the northeast of England to access the world’s largest known deposit of polyhalite.

What does Anglo American Plc do? 

Anglo American Plc is a global mining company with headquarters in London, United Kingdom.  It has a large mining portfolio that cuts across the production of copper, nickel, platinum group metals, diamonds (through De Beers), premium quality iron ore and steelmaking coal.

The business uses innovative practices and the latest technologies to ensure safety and sustainability in the mining, processing, moving and marketing of its produce to customers. 

How do the financials look? 

A review of the financial report for the six months that ended on 30 June 2023 reveals some fairly mediocre performance¹. This can be mainly attributed to inflation and weaker product prices. That may seem odd for a commodity-driven business. However, inflation also affects production costs. And it seems the latter is far outpacing the other.

Cost inflation increased by 6.3%, while the average market price for the Group’s basket of products declined by 19%. As a result, the company’s revenue significantly decreased by 13%, bringing it down to $15.7bn. At the same time, net debt is back on the rise, jumping by $1.9bn to $8.8bn. And liquidity decreased from $16.1bn to $14.9bn.

So far, the financial outlook of the company has been quite challenging, at least it appears so. And subsequently, management has been busy raising capital, primarily through debt.

In March 2023, the Group issued €500m 4.5% Senior Notes due 2028 and €500m 5.0% Senior Notes due 2031. Also, in May 2023, $900m 5.5% Senior Notes due 2033. Combined, these new loans add up to approximately $2bn. However, the long maturity dates do provide ample time for the firm to service and eventually repay these debts.

Management intends to use this newly raised capital to invest $100m to $300m a year on projects to support the FutureSmart Mining programme and the delivery of Anglo American’s Sustainable Mining Plan targets. And there are early signs that the company is stepping up its volumes in the second half of 2023.

Aside from the volatility in the stock price, the company has followed its long-established dividend policy. The Board has approved a dividend of $0.55 per share. Although there is a decrease from the dividend of $1.24 declared in June 2022, such shifts in payouts are to be expected due to the lumpy nature of its earnings. The company pay dividend often, as its latest ex-dividend date was 17 August 2023.

The bull case for the Anglo American share price 

Anglo American Plc has a portfolio of key growth projects in its various operations, which has great potential of impacting positively on the company’s progress and current expectations.

To enhance its operation in crop nutrients, Anglo American is developing the Woodsmith project in the northeast of England. This is the world’s largest known deposit of polyhalite, a natural mineral fertilizer product containing potassium, sulphur, magnesium and calcium – four of the six nutrients that every plant needs to grow.

Polyhalite will be granulated at a material handling facility to produce a comparatively low-carbon fertilizer known as POLY4. Results from on-farm demonstrations continue to reinforce the quality and characteristics of POLY4. The benefits include increased crop yields and improved soil health, tackling some of the greatest challenges the food industry is facing today.

Upon successful completion of the Woodsmith project, there is a high possibility of massive sales of this premium quality fertilizer as it is suitable for organic use. In my opinion, this will be a favourable tailwind to the financials of the company. 

There are also several ongoing life extension projects. For its Diamond operations, there is an ongoing life extension project of 4 Mctpa underground replacement for the existing open pit in Venetia. The first production was recently achieved in 2023, with a ramp-up over the next few years as development continues. Similar life extension projects are ongoing in certain mining locations in its Iron Ore and PGM operations. 

This project seeks to ensure longevity as well as guarantee the steady supply of products to its customers without any disruption or possible decline in the quality of products. Thus, positive progress is certain in the long run.  

Undoubtedly, these are value-adding ventures for the company. As the projects yield results and inflation begins to cool off, I can see the Anglo American share price bouncing higher in the long run.

The bear case for the Anglo American share price

It’s not all rosy for Anglo American shares. Already, I had noted some of my worries with the Anglo American stock.

As expected with all business, Anglo American is exposed to a variety of risks and uncertainties that may adversely have a financial, operational or reputational impact on the company. These risks include but are not limited to:

• Changes in an economic environment, like product prices
• Tax rates and regimes
• Natural catastrophe risk
• Delays and complexities in regulatory and permit approvals.

A typical example of delay in permitting was experienced by the company getting an environmental permit for the Los Bronces open-pit expansion, and underground development was approved on 17 April 2023. However, the Los Bronces mine plan is being updated to take into account the delay in the permit approval and reflect the ongoing permitting complexities in the region.

Regardless of the approval, the expected delay in finalising the permitting process will impact the development of the next phase of the mine, which enables access to higher-grade, softer ore.

Generally, these risks and uncertainties can be a clog on the wheel of progress of the company. While these risks exist, I don’t see them as doing a fatal blow to the company. However, in the short term, they affect the Anglo American share price.

Anglo American Share price prediction 

Despite the recent trajectory placing Anglo American shares on the wrong path, the mining stock has still more than doubled from its pandemic lows. Such companies are notoriously cyclical. And by correctly predicting the troughs and peaks, investors can reap a potentially large return. So what are the analysts saying?

Today, there seem to be a lot of mixed opinions. Some experts believe shares could fall a further 12% to 1,949p. Others are seemingly more bullish with expectations as high as 3499p! Despite this, the overall consensus appears to be Hold.

Should I buy Anglo American shares today?  

While Anglo American Plc is one of the biggest mining companies in the UK, I am not considering adding it to my portfolio for now.

The company has struggled to effectively manage cost inflation and other variables which are significantly affecting the company fundamentals and assets. And while the ongoing projects look promising, I don’t believe they are sustainable enough to cushion the ongoing financial decline.

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Article sources

1. London Stock Exchange: Anglo American Half Year Report for the year ended 30 June, 2023. 

Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.