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Anglo American’s Earnings Target Seen ‘Too Ambitious’ by Liberum

Anglo American Plc may fall short of earnings targets because of accelerating inflation in its markets, an extensive capital-expenditure plan and over-dependence on asset sales, brokerage Liberum Capital Ltd. said.

Chief Executive Officer Mark Cutifani, who began a review of operations from Australia to Brazil after joining the London-based diversified mining company in April 2013, set a goal of at least a 15 percent return on capital by 2016 selling as many as 16 assets, cutting costs and lifting profit.

“We believe it is too ambitious,” Liberum analysts Ben Davis and Richard Knights said today in a note to investors. “Our estimated 10.8 percent ROCE in 2016 will disappoint investors and with Anglo’s bleak earnings outlook, weak yield and significant project risk, we remain conviction sellers.”

On July 21, Anglo put four platinum mines and potentially two ventures in South Africa up for sale after agreeing earlier in the month to divest its 50 percent stake in Lafarge Tarmac to partner Lafarge SA for at least $1.5 billion. Anglo has nine more assets identified for sale.

“Current disposal program could improve 2016 ROCE by 4.4 percent,” Liberum said. “However to fully impact the average capital employed in 2016, sales need to be made at or above book value and before the end of 2015. Given the hurdles to asset sales in the platinum and building materials industries, a speedy disposal of Anglo’s underperforming assets should not be taken for granted.”

Unemployment, Strikes

About 31 percent of Anglo’s 2014 earnings will come from South African operations, while all of the African continent will contribute 67 percent, according to the note. South Africa’s economy contracted in the first quarter for the first time since 2009 as the second-biggest African economy battled 25 percent unemployment and mining industry strikes sapped investor confidence.

Anglo’s first-half profit rose to $1.28 billion from $1.25 billion on higher output and lower production costs. Return on capital declined to 10 percent from 11 percent a year earlier.

Inflation is another hurdle, Liberum said. High local inflation, including in South Africa, in the past 18 months has reduced Anglo’s earnings before interest and tax by 16 percent, the analysts said. Cost improvements benefited only 6 percent.

“On current consensus forecasts, inflation will negatively impact a further $1.7 billion, effectively doubling the remaining required $1.4 billion targeted uplift.”

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