Anglo American expects a 3% drop in production for the current year. That comes as the planned ramp up at its Quellaveco copper mine and strong diamond production have been more than offset by lower ore grades in Chile, and production drops from Kumba Iron Ore and PGMs (platinum group metals).
The group expects capital expenditures in the region of $5.7bn, lower than previously expected due to supply chain disruptions, worker availability and exchange rate movements. Unit costs have risen around 16%.
For 2023, production is expected to rise 5% with capex forecast between $6-$6.5bn. Unit costs are forecast to be around 3% higher over the year.
The shares were unmoved following the announcement.
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Our view
Not six months ago Anglo was hailing record profits. Now, double-digit drops in revenue and profits mean shareholder returns have taken a hefty hit. A stark reminder of how quickly things can change when you're reliant on commodity prices.
Though, whilst these drops may look scary, it's worth remembering they're being compared with some of the best conditions seen in years. Return on capital employed, a measure of profitability, was 36% over the first half and well ahead of Anglo's 15% target.
Nevertheless, the environment is getting tougher. Costs are soaring and more volatile weather conditions are causing disruptions at mines. All in, recent production guidance saw downgrades across the board.
Looking at Anglo's operations, there are some things we admire.
Its strategy of diversifying between industrial and consumer products makes sense. Demand for industrial commodities, like iron ore and coal, is very economically sensitive because when conditions are tough plans for new factories and skyscrapers quickly get scrapped. Consumer demand, like that for the DeBeers diamond business, is generally more reliable and can help to pick up the slack in cyclical downturns.
That's not to say that a severe economic downturn wouldn't dent Anglo's performance, of course. That's why financial resilience remains key.
Net debt now only equates to a fraction of cash profits. And at this level of debt, that'll still be the case even if profits come down in the future.
The now complete coal demerger will be welcomed by some too - thermal coal is a particularly dirty fuel. Hiving it off from the rest of the group means Anglo can boost its environmental credentials, which could mean more eco-conscious investors would feel comfortable including Anglo in their portfolios. Operationally speaking, coal was already quite a small part of the whole, so this shouldn't change the status quo much.
Over the long term, Anglo's diversified approach means it isn't beholden to the fortunes of a single commodity price. We see opportunities for growth in copper, with the expansion of its Quellaveco mine on time and more importantly, on budget. And the Woodsmith project gives another growth angle in crop nutrients, with physical production expected to start in early in 2023. The group already has its fingers in the pies of assets that contribute to the global de-carbonisation effort, which should be a longer-term growth driver too.
But we shouldn't look past the fact the near term remains uncertain. This is important to bear in mind because, with a policy to pay out 40% of profits, lower profits mean lower returns.
Anglo American key facts
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