More observations on Anglo, post results

Thanks again for your feedback, we really appreciate it. This is a piece on Anglo, following our piece from yesterday, in case you missed it: Anglo American results, how good were they? Packed with useful insights about the company, and specifically what it has meant for you, if you are a shareholder. We shall call the long time reader, and even longer time investor in equity markets, nearly spanning 5 decades, Wilson. Why Wilson? Because Wilson is my most favourite character in a TV show, remember the next door neighbour in Home Improvement? The guy with the hat who would always talk to Tim the Toolman Taylor about his problems, that was Wilson. You would never see his face, but he always had the solution. Here is Wilson's response:

"AGL has actually been in a 30 year decline since HFO retired in 1983. Then the dividend was about 50 USc - a shareholder will be lucky to receive $1 in 2013. Sure the no. of shares is more, but I don't recall any splits.


About 50% of the business is in South Africa and 50% outside. Both halves have successful divisions and problem divisions.


I wonder if the best shareholder value may not be realised by splitting AGL into two. The RSA portion can then be sold to the State as its base for the State Mining Corporation and the overseas half can be sold to any of BHP, RIO or even Glencore.


Sure, there are problems to this - de Beers for example probably operates in both jurisdictions – and there will be other similar problems. But the hard truth is that AGL actually earned $400m in the 6 months – about 31c per share. Underlying earnings are often wishful thinking. AngloPlats for example increased its borrowings by R3bn in the 6 months and Minas Rio in Brazil is a real problem."

Firstly, the point about underlying profits being wishful thinking. What Wilson is referring to is a measure that companies use, which does not necessarily conform to accounting norms. Let me try and explain by presenting the Investopedia definition of underlying profits: "A term used to describe the actual reflection of a company's profit. The underlying profit is not the required accounting profit that is recorded on financial statements and documents mandatory to follow preset rules and regulations. This number is calculated by the company to show what they believe to be an accurate reading of the company's profit position and may exclude one time charges or infrequent events."

So you see the point that Wilson is making, the company is telling us what the "underlying profits" are, but the basic earnings per share is the key number, and that is the 31 US cents a share number that the company give. So we will have to agree with Wilson here.


Next, how hard would it be to split the company into a South African one and then an international one? So, all the South African assets, would they actually be worth more than the rest of the business at the moment? Quite possibly actually. Have a look at the "underlying profits" from the Anglo presentation from Friday. I had to panel beat these images to fit:

First and foremost, (and a little later in the presentation) the most profitable region for the company is South Africa, which constitutes 2.159 billion Dollars of the 3.262 billion Dollars of group "underlying profits". That is two thirds of profits. And the rumour mill suggests that Anglo could be looking to buy out the minorities in Kumba Iron Ore, that would require a cheque of 43 billion Rand or just shy of 4.4 billion Dollars. No doubt there would have to be a premium too and politically, I am sure that there would be push back on that score.


Anglo suggest in another slide that their portfolio is a little more diverse than their peers. Again, are they the right assets? Here is another slide from their presentation, showing how the mix has changed over the last half a decade:

And then lastly, in a world of choices, which one would you be most compelled to buy? We gave you a heads up about the Rio Tinto and BHP Billiton share price performance over the last twelve months, relative to a much worse Vale and Anglo American, the question must be about the earnings make up in the long run. You can see from the charts below, also taken from the same Anglo presentation, that the earnings mix from some diversified miners is not as diversified as one might actually like:

The higher energy mix in BHP Billiton is still more compelling as a longer dated investment, the better geographical mix in more favourable territories and the size and scale issues make it the best choice for us. All very interesting!