An in-depth analysis of what to expect from Anglo American’s interim results

By Shaun Murison*

Anglo American Plc is the fifth largest diversified mining company in the world in terms of market capitalisation with a primary listing in London (Ftse) and a secondary listing in South Africa (JSE). The company is set to release 2014 interim results on the 25th July 2014.

Anglo American Plc recently released a production report ahead of its scheduled interim results and we take a brief look at how production has related to company revenue and earnings in the past.

The production report for the 2014 interim period highlights the following percentage gains from the 2013 comparative; iron ore +5%, export metallurgical coal +21%, export thermal coal +4%, copper +12%, nickel +35% and diamonds +12%. Due to the prolonged strike within the platinum sector, platinum production fell 39% over the interim period.

Using 2013 full year results as the most recent full year reference point, we note that  the contribution of the respective resources to the group’s revenue historically are as follows,  iron ore 19.71%, diamonds 19.37%, platinum 17.2%, copper 16.31%, metallurgical coal 10.27%, thermal coal 9.09% and nickel 0.41%. The remainder of revenue contributions came from other mining and industrial activities as well as niobium and phosphates.

When removing cost of sales, operating expenses, tax and dividends to preference shareholders and bondholders from revenue we arrive at perhaps a more meaningful weighting of historical earnings from the various resources. The full year 2013 divide of earnings shows the following contributions: iron ore 42.09%, copper 30.04%, diamonds 19.90%, thermal coal 14.85%, platinum 10.74%, metallurgical coal 2.24% and nickel with a negative contribution of -2.02%. Further negative contributions to the overall earnings were from other mining and industrial activities, exploration, corporate activities and unallocated costs.

1H2014 Production 2013 Revenue Contribution (FY) 2013 Earnings Contribution (FY)
Iron Ore +5% +19.71% +42.09%
Metallurgical Coal +21% +10.27% +2.24%
Thermal Coal +4% +9.09% +14.85%
Copper +12% +16.31% +30.04%
Nickel +35% +0.41% -2.02%
Diamonds +12% +19.37 +19.90%
Platinum -39% +17.2% +10.74%
Other +7.64% -19.86%

Looking at the recent production report relative to previous earnings, it is noted that the dramatic improvement in nickel output equates to very little in terms of group earnings especially when we consider lasts years contribution was negative. Iron ore, of which the bulk of production is through Anglo American Plc’s subsidiary Kumba Iron Ore, is by far the most important contributor to group earnings. Over the six month reporting period, the spot price of iron ore has declined around 27.61%, more than offsetting the benefit of a weaker rand for South Africa exporters of the metal. As a result, the 5% production increase from Kumba hasn’t translated into higher profitability and the company earnings have been reported 16% lower than in the 2013 interim comparative.

The impact of the five month long strike on Rustenburg mining operations, combined with a depressed platinum price witnesses Anglo American Platinum (Anglo American Plc’s subsidiary and number one platinum producer in the world) results reflect a basic earnings  decline of 65%.  With iron ore and platinum accounting for a sizeable proportion of historical earnings (around 52% of total earnings, 44% of positive earnings contributions), copper, diamond and thermal coal will need to offset the earnings drag induced from the aforementioned if we are to witness improved interim results from Anglo American Plc. Thermal coal prices have however declined around 10% over the period while copper has given up around 6%. Currency movements have been flat to less favourable in the last three months of the six month period to be reported.

Consensus estimates predict that Anglo American Plc’s earnings for the interim period will reflect a year-on-year decline of 9.3% to 88.9 U.S. cents per share.

AGL

The price of Anglo American Plc (SA) has been trading within a broad range for the last four months, between levels 25500 and 28700. The price has found resistance at the top of the range whilst in overbought territory and is experiencing a short term decline. The long term trend however remains up, as the price trades firmly above the 200 day simple moving average (blue line). With the long term trend in mind trend followers would look for entry in line with this trend, waiting for a break above resistance at 28700 or reversal near support at 25500 for long entry.

 

* Shaun Murison, an analyst at IG, has worked in financial markets for over eight years, and until recently ran IG’s Durban branch in South Africa, before moving to Johannesburg.

 

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