Anglo American results, how good were they?

Anglo American reported their half year numbers on Friday, and because this used to be the South African company that everyone talked about, it still attracts more attention than most. When I was growing up, folks asked "what, do I look like an Oppenheimer?" when asked to pay a seemingly outlandish amount for something. Nowadays I guess you can substitute that with a whole host of names, Christo Wiese, Patrice Motsepe are among a couple.


In our core client portfolios around a decade ago we added Anglo American as the diversified miner of choice. We dropped them when the Rand strengthened through the 6 to the Dollar mark, figuring that the currency would weigh on earnings. It was in 2004 that we started adding BHP Billiton, we liked their energy mix, uranium at the time, plus a growing oil and gas business. And we preferred their geographical mix, BHP Billiton that is. How was anyone to know what the resources boom would throw out, and how insatiable demand from China would change the resources and mining landscape as we know it. Suddenly, the diversified miners became some of the most exciting investment opportunities, their share prices reacted accordingly. But then "things" unwound in 2008. The Chinese however boosted their infrastructure build, and demand for raw materials remained robust.


But. Something then happened. In the case of Anglo, and many deep level miners in South Africa started having serious problems. Electricity prices, wages, labour issues, government push back to company plans, it all got a little toxic. And let us just say that landscape remains frigid looking. But we know that, the share price in London has reacted accordingly. When the market peaked in May of 2008, the share price was at 35.40 Pounds. It fell to around 10 Pounds in late February 2009, and then picked up all the way through to 34.20 in February of 2011. But then fell to a 52 week low of 11.95, just a few weeks ago. Currently the price has recovered to 13.91 Pounds. The last 12 months however have seen a return of negative 26 percent for shareholders. And loads of questions unanswered, plus a new CEO. Some would argue that the new CEO is a net positive, I would be inclined to agree on that score.


Anglo American have implemented a new program called "Driving Value". Mark Cutifani has only been on the job for three and a half months, but already he has already been hard at it. Identifying places to cut costs. And shrinking the business divisions from ten to six, I think that makes sense from a costs point of view. Minas Rio is the project that Cutifani has been handed, in the same way that you are handed old ingredients and must come up with a masterchef piece. The project is, as Cutifani discussed, 4 in 1. And approvals are 98 percent complete.

Numbers wise, higher tax rates, higher debt levels, greater levels of minorities at Anglo American Sur (they were forced sellers to an extent) translated through to lower profits. But even though operating profit was down 15 percent to 3.3 billion Dollars, it was more than the market had anticipated. Underlying earnings sank by 28 percent to 1.3 billion Dollars, translated to EPS of 98 cents. The dividend was maintained at 32 cents. I guess earnings "move" as a function of the exchange rate, at the current exchange rate that translates to 961 ZA cents of earnings for the first half of their financial year, and 313 ZA cents dividend. I guess you could argue that the stock is fully priced currently.


I would think however at best that the next two to three years are going to be really tough to grow earnings significantly. Even though the analyst community have pencilled in pretty aggressive earnings growth for that time. It all depends on volumes and prices, one is able to be controlled in large part, the other is a moving target. We have a pretty good idea of what the demand picture looks like. But that isn't a given I guess.


Unfortunately Anglo shares have lagged their peers. What can Mark Cutifani do different to his support base? The Vale and Anglo share price performance over the last year looks identical, both down around 30 percent. Rio Tinto and BHP Billiton share price performance also looks exactly the same, up a few percent, this is all in London. Are we being too scientific about the South African specific issues? Is it a case of perceptually the market says, this is a developing world mining company, sell it, this is a developed market mining company, it is OK-ish.


So until everyone starts to get the faith back about emerging markets, this stock might lag. Outperformance will be determined over the next five years. Time will tell whether Cutifani and his team can cut costs and make the business a leaner machine. I am sure he will. And in the process he will shape the corporate culture for the coming years. Whether or not their diversification mix will stand up the next commodity moves, Chinese consumption, that remains to be seen. We continue to recommend and buy BHP Billiton as our main diversified miner.