Valuation: Anglo American (LON:AAL) FY2022

This has not aged well! But here is the view I held on intrinsic value of AAL in May 2023

I first published this post in May 2023 on the Trading 212 app in the Value Investing community, under the username “Anathema”

Update March 2024: in hindsight, I had tried to consider some bearish market considerations, but I did not adequately consider several of these bear cases occurring simultaneously. A more detailed review of commodity prices a year ago, plus a better understanding of AAL's reliance on South Africa's rail infrastructure and the problems it was facing, may have helped me reach a more conservative valuation. But we live and learn!

I thought I'd share my assessment of Anglo American plc (LON:AAL - note, same ticker as American Airlines on NYSE!)

What do AAL do?

Anglo American are a diversified mining company headquartered in London but with operations in Australia, Africa, Europe, S. America and Canada. They employ around 90,000 people and operate in the following segments:

- PGMs (25% - 30% by revenue, 35% - 40% by underlying earnings)

- Coal (13% by revenue, recently 27% by earnings)

- Iron Ore (20% - 30% by revenue, recently around 20% by earnings, having dropped heavily in the last few years)

- Copper (15% by revenue, 13% by earnings)

- Diamonds (De Beers, 18% by revenue, around 9% by earnings)

- Nickel (2% revenue, 4% earnings)

- Manganese (2% revenue, 2% - 3% earnings)

- crop nutrients (polyhalite, 1% revenue and a loss of around 1%).

5y CAGR for revenue is 6%, significantly lower after a 15% drop from 2021 to 2022. 5y CAGR for EBIT is 13% and 7% - 8% for both earnings and EPS. Dividend yield is around 7% currently and, although dividends were lower in 2022 than 2021, they have grown on average by around 17% each year for the last 5 years. Dividends remain well covered by earnings and operating cash flow.

Balance Sheet and Valuations

The Company is cash-rich, with a Quick Ratio and Current Ratio both consistently above 1. Total assets are around twice total liabilities and debt is below 40% equity. Interest is very well covered, and ROIC exceeds WACC of ~9%. The cash conversion cycle increased to around 250 days, dominated by an increase in inventory relative to COGS. CapEx is outstripping depreciation, consequently FCF has been a relatively low proportion of earnings of late. Book value, even adjusted for Intangibles and tax assets, is around $20/share, meaning P/B < 1.5 currently. P/E is around 8 and P/S is around 1.

Earnings and Cash Flow

2022 EPS was around $3.70, not far off half 2021 EPS but still good by historic standards. Operating cash flow was $8.7bn and FCF was $2.4bn, similar to the $2.7bn seen in 2018 but substantially below the $10bn achieved in 2021.

Outlook and potential headwinds

Future debt maturity payments are not substantially different in the future to this year. I personally perceive a risk with De Beers as people move to lab-grown diamonds, jeopardising $550M or 9% in earnings. Copper, iron ore and coal prices are all back to 2021 levels. I think this puts ~ $1.5bn - $2bn of earnings at risk, or around 33% of earnings.

Fair Value

If I feed my Monte Carlo estimator with the following:

-EPS $2.80 - $3 with a growth rate from 0% to -30%

- book value of $20 to $27

- WACC of 8% to 10%

- RFR of 2% to 5%

- terminal PE from 5 to 10

I estimate the share price ought to be higher than $40.

In fact, I struggle to justify a share price below £30, so with a current price of £23.38, I believe this is an attractive stock. I will be looking to add to my holding. NFA, DYOR.