Anglo operations deliver, share price still has way to go

Anglo American shares accelerated their recent rally on Tuesday after delivering solid operational results for the 3^rd quarter ending September. Despite this, some analysts think the share still looks cheap at current levels.

Shares on the JSE closed 2% higher at R185.61 per share, despite coming off in late afternoon trade as the British Pound gave way to the Rand. The Anglo share price in London was up 4% at the time of writing (£11.09 per share). Anglo shares are now almost 17% higher on a one-month basis in London.

When compared to the first nine months of 2015, iron ore production from Kumba and diamond production from De Beers was 13% and 9% lower respectively. This was deliberate, as the company had guided it would be catering for lower demand in each of its markets (in the case of De Beers, the result of restructuring its businesses in the case of Kumba.

The strategy appears to be working for De Beers. The curtailment of supply in a market where it is still the largest producer has resulted in an increase in diamond prices during the third quarter. By one estimate, prices have risen by 24% since the end of June, and improving market conditions means De Beers has now begun to sell more volume.

Kumba’s Sishen mine delivered an outstanding result for the quarter, raising production by 46% to 8.3 million tonnes over the prior quarter due to “a significant improvement in productivity” which included increased run-of-mine feed rates, improved quality feedstock material and better plant yields. Waste removal also fell significantly, and will remain in line with full year guidance.

Kumba shares closed 1.36% higher at R132.17 per share.

Production of metallurgical coal and platinum remained broadly unchanged for the nine months of the year.

Copper production was 6% lower at 430 500 tonnes due to expected lower grades at Los Bronces, and unexpected strikes at Los Bronces and El Soldado. This was partially offset by better grades and improved plant performance at Collahuasi.

Nickel was the stand-out performer, raising production by 70% following completion of the Barro Alto furnace rebuilds undertaken last year.

Minas-Rio increased tonnage of iron ore by 53% over the quarter to 4.5 million tonnes, and its ramp-up remains on track.

Despite Anglo’s great revival this year – the share price in London has advanced 272% – some analysts think there is still value there. JP Morgan analysts wrote on Tuesday, “Anglo American is one of our key picks in the sector, trading at an unjustified discount to peers, which we believe will narrow with progress on restructuring and an improving balance sheet. Anglo appears compellingly cheap on a mark-to-market price earnings ratio of 5.6x our expected 2017 earnings.”

Given the delay in executing the restructuring plan, It is likely that the next quandary Cutifani is going to face, is to reverse course on stated plans. Especially given the rapid recovery in the prices of underlying commodities Anglo deems non-core, coal and iron ore in particular.

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