The FTSE 100 multi-commodity miner Anglo American (LSE: AAL) reported a slight decline in net profits for 2020 earlier today. That sounds disappointing. But I think there is far more going for the stock than not.
In fact, I think it is one I could buy and hold for the next decade.
Here is why.
#1. A commodity supercycle could be underway
Leading forecasters are saying that a commodity supercycle may be underway. Simply put, this means that we may expect a continued boom in commodities demand for a long time. Driven by Chinese public spending last year, the boom may already have started. This is evident from industrial metals’ rising prices.
#2. Back to the Roaring ’20s
Related to commodities’ supercycle is the idea of the ‘Roaring ‘20s’. There is increasing speculation that much like in the 1920s, we may be in for a sustained boom through the 2020s brought on by, among other things, huge spending post-Covid-19.
Booms are great for cyclicals, like miners of industrial metals, in any case. But AAL can benefit from two trends in particular.
One, 25% of AAL’s profits come from platinum group metals (PGMs), a raw material for the automotive sector, which is sensitive to economic conditions.
Two, luxury spending on diamonds can also rise. AAL is one of the world’s biggest producer of diamonds through DeBeers, which contributes to 10% of its revenues. This can be another positive for the stock.
Risks to the FTSE 100 share
As bullish as I am on AAL, the fact is that there are risks to the stock as well. There are two reasons for this.
#1. The promised boom does not happen
If neither the commodity supercycle nor the Roaring ‘20s play out, we could see far more moderate growth levels. Or worse.
We are still in a slowdown. Government debts around the world have climbed to screeching highs. Unemployment is expected to rise as government support is withdrawn and businesses could fold-up. So I’d take the positive predictions with a pinch of salt.
#2. Cyclicals can get weighed down
The cyclical market for non-essentials like PGMs and diamonds in particular could suffer from this. Diamonds specifically are already facing competition from less-pricey industrial diamonds. An economic decline could accelerate the process even more, because industrial diamonds are cheaper.
Weighing up the FTSE 100 stock’s prospects
On balance, though, I still like AAL.Boom or not, the company has been around for a long time. Held over a long enough time frame, its share price has delivered. And it has also just started paying dividends again.
Moreover, I think even if there is no runaway growth, signs of recovery are visible. FTSE 100 companies are positive on 2021 as the lockdowns lift, the Brexit limbo has been broken, and the US-China trade wars could mend.
There are still drags on the economy that cannot be wished away, but I think they can be managed.
