Should You Buy Anglo American?

LONDON -- I reckon investors should steer clear of multinational mining group Anglo American  (LSE: AAL  ) (NASDAQOTH: AAUKY  ) , as its revenues look set to remain under heavy pressure for the foreseeable future.

Lasting macro-economic jitters continue to heap pressure on commodity prices, in turn striking the top line for companies across the entire mining sector. For Anglo American specifically, a high exposure to the depressed iron ore market, alongside a weighty presence in the turbulent mining region of South Africa, is likely to weigh heavily for some time to come.

Worrying times for mining behemoth
Fundamentals in the iron ore market -- iron ore represents around 45% of Anglo American's total earnings -- continue to flag amid flailing economic activity in Europe and a patchy cyclical recovery in China. And the fundamentals look likely to worsen, as a stream of new capacity in 2014 and 2015 pushes the market into heavy surpluses over the medium to long term.

Prices for iron ore continue to topple, and Rio Tinto's chief economist, Vivek Tulpule, commented just last week that he expects prices to decline to around $100 per tonne by September 2014 from $150 tonne presently.

As well, Anglo American is also likely to face challenges from worsening mining conditions in the resources hotbed of South Africa. The company has substantial exposure to the country, with a host of assets straddling the diamond, platinum, iron ore, manganese and thermal-coal industries.

Worker discontent across the entire South African mining industry is still bubbling after a turbulent 2012, and which actually kicked off at Anglo American Platinum's Marikana mine in Rustenburg last August over a pay dispute.

Miners at the group's Kleinkopje coal mine staged a sudden wildcat strike only this week, and which followed fresh violence at the Rustenburg, Union and Amandelbult platinum facilities in February.

Anglo American announced in January plans to shutter four mine shafts at Rustenburg, which would cut platinum output by 400,000 ounces per annum as the firm restructures its South African operations. But the prospect of additional rounds of strike action in the meantime, as well as spreading restlessness at its other installations, looms large.

Cheap valuation reflects worrying outlook
City analysts expect earnings per share to creep 2% higher in 2013 to 155 pence, before picking up speed in 2014 to rise 19% to 185 pence.

Anglo American currently trades on a P/E ratio of 12 for the current year and 10.1 for 2014, lower than the average of 15.2 attached to the broader mining sector. In my opinion, the company's cheap rating is justified, as I believe further troubles could be ahead for the diversified mining group.

The canny guide for clever investors
Although Anglo American presents too much risk at current prices in my opinion, this newly updated special report featuring ace fund manager Neil Woodford highlights a host of other red-hot FTSE winners offering stunning value for money.

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9/28/2016 10:22 AM
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