The Anglo American (LSE:AAL) share price has been a stellar performer over the last year. After being dealt a hefty blow in early 2020 due to internal and external operational disruptions, the stock price has since been on the rise. And it is now 125% higher than 12 months ago!
What caused this impressive growth? And should I be adding this company to my portfolio?
The rising Anglo American share price
With many mining sites being temporarily shut down in the early days of the pandemic, a subsequent shortage of metals began. This is what appears to have triggered the start of the rising commodity prices. As manufacturing businesses slowly reopened their factories, demand built up. However, it quickly started accelerating as many countries worldwide initiated new infrastructure projects, especially within the energy sector.
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The limited supply combined with the rising demand naturally led to resource prices going up. This is fantastic news for Anglo American, which is a leading producer of copper, iron and platinum. And so it was able to achieve some pretty impressive results, in my opinion. And that was despite the fact the firm suffered a severe plant outage in its platinum production division.
Looking at the full-year results for 2020, total revenue increased by $1bn, and underlying profits remained relatively flat. These are hardly groundbreaking results. But considering the reduced mining and production volumes, they’re not bad. At least, I think so. Since then, the business has begun executing plans to demerge from its South African coal operations and acquired Sirius Minerals to further diversify its portfolio.
With operations now returning to pre-pandemic levels and metal demand on the rise, I believe the Anglo American and its share price can continue to thrive over the long term. And it seems the management team agrees as they recently increased the shareholder dividends.
Risks to consider
Rising commodity prices have undoubtedly been beneficial to the Anglo American share price. However, the value of metals can be volatile, as shown by the firm’s fluctuating level of profitability. Currently, the demand for metals like Iron and copper far exceeds the available supply. But this will not always be the case. With more mining companies returning to full operational capacity and additional mining sites being established, the market may eventually become saturated.
As a consequence, metal prices could very quickly start falling again. And since the costs of mining remain relatively fixed, the level of Anglo American’s profitability could be significantly impacted.
The bottom line
With the world shifting towards electric vehicles and renewable energy, I believe the need for metals like platinum and copper isn’t going to disappear any time soon. Combining this with Anglo American’s diverse portfolio of materials makes me think the share price can continue to climb higher.
Therefore, while there are some substantial risks, I would consider adding the business to my portfolio.
