Comfortable beat, but problems persist

Anglo American have delivered results for the full year to end December this morning. Talk about a stock on the tear, this is definitely one of them that has blown them all away this year. Anglo is up nearly 25 percent this year alone!!! But over three years, Anglo is down 29 percent. Over a decade the stock is, in Rand terms, not that spectacular. The ten year performance of Anglo American in London is a less impressive 11 percent return. Yes. True. Versus BHP Billiton in London the divergence comes in 2008, after the purchase by Anglo of a very expensive iron ore asset in Brazil and just before Anglo had to recapitalise Anglo Platinum. Or swap debt, I guess. BHP Billiton is up nearly 300 percent in London over the last decade. Wow. Astonishing.


But you sometimes have been dealt a set of cards that you have to squirm around. It is true to say that Mark Cutifani was passed something not associated with the Anglo American of yesteryear. He, Cutifani, is a tough Australian mining engineer, with real on the ground experience. He is different from all of the Anglo American CEO's before him. It has not been an easy ride for him anywhere in his career, not at AngloGold Ashanti, and definitely not at Anglo American. Time will tell whether or not he has both the skill set (everyone seems to think so, so do I) and more importantly, whether the operating conditions and the commodity prices move in the right direction for him. Clearly Cynthia Carroll, who earned around 1.37 million Pounds when she was at Anglo overpaid for some assets and dumped some high profile management out of the companies subsidiaries.


Preliminary results for Anglo American year ended 31 December 2013 are available to download from their website. Kumba Iron Ore contributed 47 percent of all operating profits, their copper assets contributed 26 percent of operating profits. Diamonds were around 15 percent of operating profits. Add all of those things up, Kumba, copper assets and diamonds (De Beers stake) and you are at nearly 90 percent.


The company haves written off 1.9 billion Dollars worth of assets, Barro Alto furnace write off and impairment of the asset of 0.7 billion Dollars. Barro Alto is a teeny town in the middle of Brazil, but home to a major nickel mine. Nickel of course is used in steel manufacturing, because of its properties of being electrically conductive and corrosion resistance. In 1999 the nickel price was 4600 Dollars a ton. By 2004 it had risen to 15 thousand Dollars a ton, a three fold increase and some more. A massive surge in the price from 2006 through to the middle of 2007 saw the price shoot up to an incredible 51 thousand Dollars a ton, and some more. By the lows of the equities market in early 2009, the nickel price had fallen to 9000 dollars a ton. Wow. Back to 28 thousand in February 2011, and now around 14 thousand Dollars a ton. Now I ask you with onion tears in my eyes, how do you plan in a scenario like that? It is nigh impossible to be able to report back on cost containment. I can understand how Anglo are not going to be giving this a full tilt.


Talking about expensive assets, Minas Rio is set to be at 26 million tons per annum production from 2016. the expensive project is 84 percent complete, with the first ore expected to be loaded before the year is out. Platinum guidance has been raised at Amplats to 2.3 to 2.4 million ounces per annum. Diamonds, around 32 million carats per annum. That is pleasing, production guided higher.

The results were a comfortable beat on pretty low expectations, 209 US cents (basic earnings) for the year with a basic loss of 75 cents per share. The full year dividend was 85 US cents for the year, the final dividend unchanged at 53 cents. The risks still remain however that the company gets the bulk of their earnings from South Africa, where labour relations and government and mines are hardly friendly. I am sure that all stakeholders will work harder during the current year to ensure stability. Although Michael tells me that he saw an interview this morning with AMCU leader Joseph Mathunjwa in which he said that they are pressing on with their demands. So whilst it may have been quiet, the risks of violence remains.


Anglo does not look cheap. Not at all. I would suggest that after this recent rally that there remains an opportunity to exit the stock. There are better mining assets in better geographies with fewer problems, namely BHP Billiton, which remains our top and only pick in the diversified mining space.