For those cheering the remarkable turnaround at Anglo American PLC, which has just reported its first annual net profit in five years, it’s worth keeping the following in mind:
- Hardly anyone in the industry foresaw the savage commodity price declines that crippled miners in 2015.
- Hardly anyone in the industry anticipated bulk commodity prices would rebound strongly in the latter half of 2016.
Anglo's stock has almost trebled over the past 12 months and the cost of insuring five-year debt against default has plummeted. But while there are grounds to trust CEO Mark Cutifani's statement that Anglo is now "in a different place", mining is still a highly uncertain business. Prudence is paramount.
Sensibly, Cutifani has dramatically scaled back a plan to cull Anglo’s assets to pay off debt. The bulk commodity rebound means there isn’t the urgency any more. Iron ore and coal, previously deemed non-core, generated pretty decent earnings last year.
Even with just $1.8 billion in disposal proceeds in 2016 (less than half the original target), Anglo's net debt has fallen by one third to $8.5 billion, or 1.4 times Ebitda. Though a lower tax bill and better inventory management lent a helping hand, the company didn't rely on fickle commodity prices to deliver that cash improvement. In fact, prices were on average 3 percent lower in 2016 than 2015 because of cheaper diamonds and platinum. Credit rating agencies will no doubt look kindly on that.
Nevertheless, anyone who bought Anglo stock back in 2011 is still sitting on more than 50 percent of paper losses. With Ebitda expected to expand another 30 percent in 2017, according to the Bloomberg consensus forecast, some investors might hope for a quicker reinstatement of the dividend. Instead, the company plans to restore payouts at the end of this year.
The dividend question isn't just about short-term greed; they also provide a useful restraint on the industry. Anglo has done well to cut cost and is promising to keep 2017 capex on a par with last year -- which was more than one-third below 2015. Yet there's no better way to prevent miners going on another 2011-style value-destroying spending binge than making sure they’re not sitting on too much cash in the first place.
You can see why Cutifani might wait though. With Donald Trump occupying the White House, India (an important diamond buyer) launching a poorly executed war on cash and China’s debt bubble unresolved, it’s hard to argue that the environment for commodities and precious metals has become more predictable.
Anglo’s diamonds may be forever, but dividends must wait for another day.
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