ii view: Anglo American’s copper prospects shine

Shares for this mining heavyweight are down over 10% in 2022 and offer a dividend yield of more than 7%. We assess prospects. 

First copper production from Quellaveco in Peru

Lead manager at of the project Tom McCulley said: 

"First copper production at Quellaveco is a key milestone in our delivery of this world-class asset, on time and on budget.  The fact that we are today producing copper less than four years after project approval, including through two years of considerable pandemic-related disruption, is testament to the strength of our commitment to our workforce, local communities, the Moquegua region and government stakeholders in Peru.”

ii round-up:

Diversified miner and FTSE 100 index constituent Anglo American (LSE:AAL) today announced the first copper production from its Quellaveco open pit mine in southern Peru.

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Having first began construction in 2018, and with a total estimated cost of $5.5 billion (£4.6 billion) including $0.6 billion (£0.5 billion) from Covid-19 related delays, Quellaveco is expected to produce 300,000 tonnes of copper equivalent per year on average over its first 10 years of production. 

Anglo shares fell by just over 2% in UK trading, similar to rival copper miner Antofagasta (LSE:ANTO). The price of copper year-to-date is down by close to a quarter as investors have fretted over a potential recession and its likely impact on demand. Anglo shares during 2022 are down around 12%, while shares for more copper focused miner Antofagasta are down by a similar amount to the copper price.

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Anglo American’s commodities include copper, iron ore, thermal and metallurgical or coking coal, along with Platinum Group Metals (PGM) and diamonds via its major shareholding in De Beers. PGM's generate its largest slug of profit at just over a third of overall adjusted group earnings, closely followed by iron ore at around a third and copper at one-fifth.

Its first production of copper concentrate marks the beginning of the normal period of testing the processing plant with ore and the ramping up of mining activities to demonstrate readiness for operations. 

Anglo owns 60% of Quellaveco. An operating license enabling it to commercially sell its copper output is expected over the next 30-60 days. 

Broker Morgan Stanley highlighted that although the news comes as no surprise, it marks a major milestone in raising Anglo’s copper related profit. It estimates that Quellaveco's adjusted profit, or EBITDA could rise to between $1.8 and $1.9 billion over its 2023/2024 financial year, or 10% to 15% of the group’s total profit. 

Over its last financial year to the end of December 2021, Anglo reported a profit attributable to shareholders of $8.56 billion, a three-fold increase over the prior year. It also returned $6.2 billion to shareholders, both helped by the global recovery in demand and commodity prices from the previous year’s pandemic lockdowns. 

ii view:

Founded in 1917 and headquartered in London, Anglo today has operations in Brazil, South Africa, Chile, Peru, Colombia, Botswana, Namibia, and Australia. It employs just over 100,000 people. Current expansion projects include its Woodsmith polyhalite project in the UK. Polyhalite is used to make farming fertilisers. 

For investors, 40-year high inflation and the need for central banks to raise interest rates to try and quell such price rises offers a highly uncertain economic outlook. As with rivals such as BHP Group Ltd (LSE:BHP) and Rio Tinto (LSE:RIO), demand from China remains uncertain, with both regional pandemic lockdowns still a feature and its ties to Russia raising political tensions in the West. 

On the upside, the Quellaveco mine increases its copper production going forward. Anglo’s diversity of commodities contrasts with the more focused portfolios at rivals such as Antofagasta and Fresnillo (LSE:FRES), while a push towards climate change friendly products and away from less so considered items such as thermal coal has been ongoing.

On balance, and while some caution looks sensible given current recessionary fears, a historic and estimated future dividend yield of over 7% looks to offer plenty for income investors wanting exposure to the sector. 

Positives: 

• A basket of commodities helps even out prices rises & falls across the portfolio
• Attractive dividend yield (not guaranteed)

Negatives:

• Economic and pandemic outlook uncertainty
• The total dividend in 2020 was cut from 2019

The average rating of stock market analysts:

Buy