Those unfortunate enough (like me) to own shares in Anglo American (LSE:AAL) have had a torrid 2023. The FTSE 100 stock has fallen more than any other in the index, and is now changing hands for around 40% less than it was a year ago.
Much of this fall can be attributed to a production update provided to the stock market on 8 December 2023. The miner’s shares closed the day 19% lower.
As a shareholder, I want to know if the company’s share price is likely to recover in 2024. Or has the time come to cut my losses?
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To answer this, I think it’s necessary to look more closely at the recent announcement.
Getting into the detail
Despite noting that “the prospects for mined products have rarely looked better“, the company revealed plans to cut output by around 4% in 2024, and a further 3% in 2025.
Although a 4% increase is expected in 2026, the company will be mining less in three years time than it is today. It’s no wonder many investors took fright.
More positively, the company plans to shift its focus to higher margin operations — unit costs are expected to fall by approximately 2% in 2024.
A difficult business
This illustrates why some investors steer clear of the mining sector, believing it to be too risky.
The company’s own assessment of the challenges it faces includes unplanned production outages, fire, explosions, dam failure leading to flooding and possible interruptions to water supply, volatile product prices, erratic demand, corruption, withdrawal of mining permits, political and social instability, increased regulation and — if that’s not enough — pandemic.
With so many potential problems, I’m surprised Anglo American’s directors get out of bed in the morning!
A more positive view
But I think there are reasons to be cheerful.
Berenberg believes the stock is now trading at 5.2 times its forecast 2024 earnings — significantly below the five-year sector average of 9.7.
And compared to its book value at 30 June 2023, it’s now at a 10% discount. This has fuelled speculation that the company might become a takeover target.
Around half of the world’s precious metals are bought by China, making it the most important market for miners. Encouragingly, as a result of government policy initiatives, the International Monetary Fund has recently upgraded its growth forecasts for the country.
And the rest of the world — led by the US — is showing signs of an economic recovery.
This partly explains why Bloomberg is forecasting the demand for copper — Anglo’s most important metal and a key component of the world’s transition to net zero — to outstrip supply for the foreseeable future. It’s predicting a 20% rise in prices by 2027. This forecast was made before the company announced its production cuts.
The miner also plans to reduce previously announced levels of capital expenditure. This could free up additional cash for a more generous dividend. Although, at the moment, it’s sticking to its policy of returning 40% of its underlying earnings to shareholders.
Therefore — despite some of the challenges that the company faces — I’m not going to sell. I think all of the bad news is now out in the public domain. This makes me hopeful that some of my paper losses can be clawed back in 2024 (and beyond).
