The last 12 months has been brutal for Anglo American (LSE: AAL) shareholders. Production downgrades and successive profit warnings have seen its share price crash nearly 50%. But with long-term demand for many of its products set to soar, now could be the time for me to buy while the share price is so low.
Q4 production
The company’s Q4 production report released today (8 February), contained no more new nasty surprises. Most of the damage had already been done following its hastily convened investor update in December, which laid bare the extent of the company’s woes.
One of its key immediate priorities is dealing with the build up of iron ore inventory at its Kumba mine, in South Africa.
Transnet, the country’s state-owned logistics business, has struggled to provide freight and port services to clients. This have left Anglo American with no means of moving its mined volumes.
The government may have recognised the urgency of the situation but it does not look like there’s an end in sight to the bottlenecks.
As a result, this has forced Anglo American to reconfigure its business, including implementing a revised mine plan and structural cost reduction, to protect its margins.
Copper
One of the reasons why I like the business so much is that owns some of the world’s largest copper deposits.
In response to the decarbonisation of transport and heat, copper demand is set to explode over the next 10-plus years. Its latest production report lays bare the extent of a likely future supply cliff face when it comes to this electrification metal.
The miner’s Los Bronces asset accounts for more than 2% of the world’s known copper resources. The mine is 156 years old, and is facing cost pressure from depth and grade as a result.
It may still have enough reserves for another 34 years, but the ore in the current mining area is very hard, impacting costs. Anglo American estimates it will be at least another two years before it can open up other areas of the mine in order to blend this existing ore with higher-grade softer ores and maintain production levels.
Such challenges are not unique to Anglo American. This is an industry-wide issue. I remain firmly of the believe that as net zero commitments ramp up, existing mines won’t be able to meet demand. This fact is not at all reflected in its share price at the moment, in my view.
Long-term outlook
There is little doubt that the business is struggling at the moment. In addition to the issues above, demand for diamonds and platinum group metals (PGMs) is weak. The former because of cost-of-living pressures, and the latter as a result of an expected falling demand for catalytic converters, as EV sales increase.
Ultimately, I see these issues as short term. But beyond this, the real opportunity for me lies in structural long-term growth drivers.
Beyond decarbonisation, Western companies continue to onshore more and more of their manufacturing capability. Demand for metals over the past 20 years has predominantly come from China. I expect the next 20 years for a new wave of demand from G7 economies.
I am looking beyond the short-term operational issues and continue to accumulate shares in Anglo American whenever finances allow.
