Should I Buy Anglo American?

LONDON -- It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now: Should I buy Anglo American (LSE: AAL.L  ) ?

Anglo, American, South African
It's Anglo, and it's American, but this mining giant is primarily South African, where it holds around 40% of its assets. Anglo American is a truly global company, with interests across Africa, Europe, North and South America, Australia, and Asia, as well as a diversified portfolio covering seven commodities: copper, iron ore, nickel, metallurgical and thermal coal, diamonds, and platinum. It has been a rocky year for mining and commodity stocks, and Anglo American has found the going tough. Its shares peaked at nearly 29 pounds in February, but it is on sale today for less than 17 pounds. That's an earth-shaking 40% discount. Should I buy it?

Diamond in the rough
Falling commodity prices and high operating costs have made this a tough year for the miners, forcing some to rein back their capital-investment programs. But Anglo American's third-quarter production report showed growth in five of the seven commodities it mines -- notably, a 14% hike in iron ore to a record 12.5 million tonnes, a 12% increase in copper production, and a 10% increase in thermal coal. Only diamond production (which fell 31%) and platinum (which was flat) disappointed. Anglo American also pocketed $2 billion by selling its 25% shareholding in Anglo American Sur and bought another 40% of DeBeers from CHL Holdings, increasing its stake to 85%.

Going underground
Any share price relief was short-lived. Chief executive Cynthia Carroll was forced to step down in October under pressure from two of the company's largest investors, BlackRock and South Africa's Public Investment Corporation. The stakeholders were rattled by wildcat strike action that hit platinum production, and they worried about poor project management and operational performance. Carroll, the company's first female and non-South African executive, will work into 2013 until a successor is named, which could make for lingering uncertainty. Mining in South Africa is never easy, with Anglo American's South African operations suffering from uncertain supply of water, electricity, and skilled labor. Falling commodity prices are hurting every mining company, and cash-strapped governments are looking for new ways to ramp up tax rates and royalties. But then, whoever said running a major mining company was easy?

Dig deep
There are still good reasons to invest in Anglo American. Its diversified production program gives it strength and stability. Management is pursuing a progressive dividend policy, although the yield is modest at 2.8%. There has also been speculation of a potential takeover. Deutsche Bank rates it a buy, and although the bank trimmed Anglo American's target price from 26 pounds to 25.20 pounds, that makes 17 pounds look like a good entry point. The valuation isn't too demanding, trading on a price-to-earnings ratio of 11.9. The question every investor should ask is this: What do you think will happen to China? If you're bullish on emerging markets and the global economy, you might want to drill deeper into this stock.

You might prefer this
Commodity stocks are notoriously cyclical, and that won't suit every investor. If you want a fatter dividend and a wider safety net, download our free, in-depth report "Eight Top Blue Chips Held By Britain's Super Investor." This report by Motley Fool analysts is completely free and shows where Neil Woodford, the U.K.'s top dividend investor, believes the best high-yield stocks are to be found today. Availability of this report is strictly limited, so click here.

Harvey doesn't own any shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2120945, ~/Articles/ArticleHandler.aspx, 10/26/2016 2:02:16 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 4 hours ago Sponsored by:
DOW 18,169.27 -53.76 -0.30%
S&P 500 2,143.16 -8.17 -0.38%
NASD 5,283.40 -26.43 -0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes