Portfolio Simplification And Copper Expansion Will Unlock Value

Key Takeaways

• Strategic partnerships and portfolio simplification focus on resource optimization and core minerals, aiming to enhance earnings, margins, and future growth.
  
• Cost-saving measures and operational efficiency improvements support stable EBITDA margins, higher profits, and capital return enhancements despite fluctuating commodity prices.
  
• Economic challenges in China and lab-grown diamond threats pose risks to revenue and profitability for Anglo American's diamond business, particularly De Beers.

Catalysts

Operates as a mining company in the United Kingdom and internationally.

• Anglo American's strategic partnership with Codelco on the Los Bronces and Andina resources aims to unlock at least $5 billion of pretax value through resource optimization without significant incremental CapEx, likely enhancing future earnings and returns.
  
• The simplification of Anglo American's portfolio through assets sales and strategic focus on copper, iron ore, and crop nutrients is projected to improve EBITDA margins and cash flow stability, supporting higher profits in the future.
  
• Copper growth is a central focus, with incremental annual production expected to exceed 1 million tonnes due to brownfield expansions and potential debottlenecking, positioning the company to benefit from anticipated copper market supply shortfalls, thus driving revenue growth.
  
• Significant cost-saving measures have already resulted in $1 billion realized savings in 2024 and a targeted $1.8 billion by end of 2025, directly contributing to the maintenance of stable EBITDA margins at 30% despite falling commodity prices, which should bolster net margins.
  
• The transformation strategy involves minimizing operational inefficiencies and enhancing core mineral production, which holds potential for significant return on capital improvement as the company continues to reduce leverage and harness operational excellence, positively impacting future earnings.

Anglo American Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Anglo American's revenue will decrease by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -11.2% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $2.4 billion (and earnings per share of $2.09) by about May 2028, up from $-3.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.9 billion in earnings, and the most bearish expecting $1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, up from -11.1x today. This future PE is greater than the current PE for the GB Metals and Mining industry at 8.3x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.28%, as per the Simply Wall St company report.

Anglo American Future Earnings Per Share Growth

Risks

• The ongoing economic challenges in China, a significant market for diamonds, have led to a reduction in consumer demand, which could adversely affect De Beers' revenue and overall profitability.
  
• The impact of lab-grown diamond penetration presents a threat to natural diamond demand, particularly in the U.S., leading to potential revenue losses for De Beers and reduced earnings.
  
• Slower-than-expected recovery in key markets like China and the high levels of midstream inventory pose risks to revenue stability and margin sustainability for the diamond business.
  
• The decision to implement production cuts across several mining operations to align with market demand could impact short-term revenue and EBITDA.
  
• The uncertainty and financial implications of the Woodsmith project require careful capital management, which might affect long-term capital allocation and balance sheet strength.

Valuation

• The analysts have a consensus price target of £23.469 for Anglo American based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £27.88, and the most bearish reporting a price target of just £19.13.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $25.3 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of £20.97, the analyst price target of £23.47 is 10.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.