Anglo American Stock Is a Diamond in the Rough. 2 Reasons to Buy.
The London-based mining company produces copper ore, diamonds, and platinum, but its shares are treated more like lead. It offers shareholders two ways to win.
Mining stocks have lagged behind the market, and Anglo American has lagged behind mining stocks. Its shares, though, look like a buying opportunity for investors seeking a turnaround story.
London-based Anglo American is one of the world’s leading diversified mining companies, producing copper, iron ore, diamonds, platinum, and other metals on six continents. Its stock, down 24% over the past 12 months, hasn’t performed like one, trailing larger peers like Glencore and BHP Group. Operational problems and tough conditions in several key markets, including diamonds—where the company’s De Beers unit lost money in 2023—and a disappointing multiyear production outlook late last year have rattled investors and depressed the shares.
Anglo American’s future, however, looks bright. Metals prices are improving, and the company is vowing to cut costs, improve operations, and make a strategic review of all its businesses, including a capital-intensive fertilizer project it’s building in the United Kingdom. “Nothing is off the table,” CEO Duncan Wanblad told analysts on the company’s earnings call in February. That could even mean a sale of the $30 billion company, which would be easily digestible by one of its competitors. Most paths point to a rebound for Anglo stock.
“The status quo is not an option,” says Christopher LaFemina, a mining analyst at Jefferies, who notes that if the situation doesn’t improve, Anglo American could attract an activist or a buyer.
Because of its recent troubles, Anglo American’s stock looks inexpensive. The company’s U.S. shares fetch about $12 on the over-the-counter market under the ticker NGLOY. Right now, the stock trades at about 11 times projected 2024 earnings, in line with peers. The company’s earnings power is considerably higher, with depressed prices for platinum-group metals, as well as the weak diamond market. In 2022, it netted $2.49 a share. Like many non-U.S-based miners, it has a variable dividend pegged to 40% of profits, which has resulted in a 3.9% yield over the past 12 months. LaFemina has a Buy rating and a price target equivalent to $16.50 for the U.S. shares.
Anglo American, founded in 1917, was once the dominant company in South Africa, known for its gold mines. These days, copper is Anglo American’s best business, and most of its mining operations are located outside the country. It has a new, low-cost Peruvian mine and another two in Chile. Its production is around 1.2 billion pounds annually, about a third of industry leader Freeport-McMoRan , with low cash production costs of about $1.50 a pound.
Copper also has the best long-term outlook among metals, due to limited new supply and increased demand from green energy, leading Morgan Stanley analyst Alain Gabriel to call the assets the company’s “jewel in the crown.”
The stock isn’t trading that way. Shares of Freeport, a purer copper play, have gained 6% this year and recently hit a 52-week high as the metal topped $4 a pound. Anglo is down 2%. “Anglo is not getting credit for copper because of the other issues,” LaFemina says. “It’s the best way to play copper among the diversified miners.” He puts copper at about 40% of the company’s net asset value.
One of the knocks against the company is its ongoing exposure to South Africa, where its businesses are concentrated in Anglo American Platinum, 80% owned by Anglo American, and Kumba Iron Ore
KIO
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, which is 70% owned. Both stakes could be spun off to shareholders. The country has been plagued by economic woes, crime, and power outages.
The diamond business is concentrated in southern Africa. De Beers, which sells a third of the world’s diamond production, was hit hard last year by weakening demand in key markets like China and the growth in lab-made stones.
Part of LaFemina’s bull case is a recovery in both diamonds and platinum-group metals. De Beers sells diamonds into the market 10 times a year, and the most recent sales were the best in about nine months. Palladium prices have gained 15% over the past six weeks.
The bigger challenge might be operational. Anglo American’s net debt rose by nearly $4 billion, to $10.6 billion, last year, and it could burn nearly $1 billion in cash in 2024, due in part to the $1 billion of annual capital expenditure on a giant underground fertilizer project in northern England that isn’t expected to come on-line until 2027. Analysts are lukewarm on that project, given a high projected cost of $7 billion and uncertain returns. It probably would be bullish if the company succeeds in bringing in a partner to pick up some of those costs.
Morgan Stanley’s Gabriel recently upgraded Anglo American to Overweight from Equal Weight, citing the portfolio review and potential operational improvements. His price target is only about 10% above the current price, but he puts the company’s sum-of-the-parts valuation at about $16 per share.
Ultimately, Anglo American offers shareholders two ways to win. It either cleans up its business this year, or it could find itself in the hands of a larger mining company that will develop its attractive resource base.
We’d call that striking gold.