More on Anglo American
Anglo American
Miner Anglo American’s 2004 turnover was up 27.6% to US $31.8bn, EBITDA was up 48.6% to US$7.1bn. Headline earnings (before exceptionals and goodwill, but after tax and minority interest) was up 58.7% £2.7bn largely as a result of higher commodity prices, continuing the strong first half results.
Higher base metal prices (copper, nickel and zinc) drove the increase in profits, offsetting a 5.4% fall headline earnings generated from the sale of gold (6% of headline earnings) and a 10.4% fall in headline earnings generated by the paper and packaging businesses (14% of head line earnings)
In the fist half increases in commodity prices increased Anglo American’s headline earnings by US$866m, but exchange rate losses wiped out one fourth of the increase, with inflation related cost increases claiming 12.1% of the increase in prices. This was partially offset by increased volumes adding US$75m to headline earnings. The preliminary full year results announceme gave no details of the above discussed numbers which will be presented at the AGM.
The headline earnings contribution from base metals were up 5.1× from the comparative period to US$1.0bn, sales of copper generated 78.3% of the increase. The contribution from copper increased largely as a result of higher prices (up 60.5%) and a to a lesser extent by volumes (up 8.1%). The five fold increase in headline earnings was lower than the seven fold increase reported in the first half reflecting a comparatively lower growth in copper prices and higher additional costs (energy, chemicals etc). The increase in commodity meant that base metals generated 39% of Anglo American’s headline earnings in 2004 compared with the comparative period’s 12%.
Headline earnings from Anglo American’s associate company De Beers was down 1.3% though operating profit increased by 4.2%; a sharp contrast to a 12.5% fall in headline earning and a 7.4% fall in operating profit in the first half. Successive price increases over the comparative period meant that sales prices were up 14%, which might explain the better performance in the second half. However rand denominated costs reduced profit growth. Prices were further increased by 3% in 2005.
The reduction in headline earning generated by the sales of gold was largely due to the strengthening of the rand, which has appreciated by 15%; cash costs were up 25% to US$ 268per ounce, which implies an increase in rand costs. The merger of AngloGold with Ashanti Goldfields (April 2004) boosted volumes by 8%. In the first half, Anglo American commented that Ashanti’s operations were’suffering’ due to ‘protracted under-capitalisation’ Anglo American may need to fund expansion operations. Anglo American expects to turn around Ashanti within an year.
Anglo Platinum’s (9% of headline earnings) operating profit was up 24%. Average prices of platinum group metals was up 25.9% and platinum volumes were up 6%. Platinum production was up due to the contribution of new operations. Costs increased by 9.2% in rand, which increased further when converted to dollars giving a US$784 cash cost per ounce. At the end 2004, platinum was trading at US$842 per ounce. Due to the strengthening of the rand (which will reduce margins) Anglo American comments of delaying expansion programmes.
Operating profit from Anglo American’s paper and packaging business (14% of headline earnings) was down 14.8% due to price erosion in Europe, and the strengthening of the rand in South Africa. The price erosion and the strengthening of the rand completely offset a $144m savings in cost and productivity improvements during 2004.
Anglo American claims to have saved a total US$ 554m in 2004, saving a total US$ 1.2bn through cost and efficiency improvements from 2002; better handling of materials and supplies generated most of the savings.
Demand for base metals will be strong due to the growth of the Chinese economy. However, as production increases to meet demand, prices may come under pressure. The continued strengthening of the rand will hold down Anglo American’s profit growth in the short term.
Anglo American has a $4.7bn project pipeline with further potential projects. At prevailing prices, and good cost cuts, this should increase profits. The strengthening of the rand is a concern in the short term.
Anglo American shares trade at a prospective PE× of 11.8 (1,305p) at the lower end of the range for the sector. The 3.2% yield is at the higher end of the range for the sector. The PE may reflect the effects the rand has on Anglo American:platinum expansion projects were delayed due to the strengthening of the currency. In 2004, capital expenditure on platinum was 37% below that of 2003.
Random picks: Acambis | British Airways | British Land | Chrysalis | Close Brothers | Compass | HMV | Land Securities | Prudential | Johnston Press