Is Anglo American Plc’s Rally Unstoppable?

Anglo American (LSE: AAL) stock is up more than 10% since 2 July, when I wrote that it was the best play in the mining sector. Its shares have outperformed those of Rio Tinto (LSE: RIO) and BHP Billiton (LSE: BLT) (NYSE: BBL.US) by about five percentage points and four percentage points, respectively, in less than four weeks of trading. 

All three miners look a tad pricey based on cash flow multiples, but I’d add up to 3% of Anglo American shares as part of a diversified portfolio. I’d include 1.5% of BHP Billiton shares ahead of the miner’s full-year results, which are due on 19 August. I do not like Rio stock at this level, but that’s just me. 

A Decent Performance?

Anglo’s first-half figures released on Friday came in broadly in line with expectations. Earnings per share were only slightly above consensus estimates. Anglo stock rallied for no obvious reason on the day, in my view. It’s outperforming rivals on Monday, too.

In recent weeks, Anglo shares have surged as investors have been willing to bet on a comprehensive portfolio reshuffle. Anglo’s divestment programme, however, could disappoint the market.

Disposals are central in Anglo’s strategy, which aims to deliver a very ambitious 15% return on capital employed in the next couple of years. Downside risk is partly offset by the possibility that Anglo will be taken over by a larger rival -– and that’s why I’d retain some exposure.

Divestment Risk

On Friday, Anglo dismissed press speculation surrounding its Samancor manganese joint venture with BHP Billiton.  Anglo holds a 40% stake in the JV, and intends to remain invested. End of story. 

Its platinum assets in South Africa may be sold, true — but that won’t happen until the end of 2015. Elsewhere, Australian assets are divestment candidates, too, while coal and copper mines, as well as nickel operations, are under review.

In fact, the list of divestment candidates grows by the day -– but where are the buyers?

A Market For Buyers

Miners are looking to get rid of under-performing assets, but buyers will embark on acquisitions only if the price is right.

In fact, the problem with Anglo’s divestment programme is that: a) it remains unclear how much Anglo will be able to fetch; b) it’s impossible to forecast how long it will take to get deals done; and c) and it’s also unclear who may actually afford to invest on operations that do not make their cost of capital.

Oversupply is still a real threat. Elsewhere, I wouldn’t be concerned about Anglo’s rising debts, which I believe are manageable.

Life At BHP…

BHP is also targeting divestments. It said last week that iron-ore output surged by almost 20% in the fourth quarter, which indicates its strategy is working out. Iron ore accounts for about a third of BHP’s revenue. Copper assets delivered, but guidance was less encouraging for petroleum assets.

BHP is widely expected to announce a multi-billion pound stock buyback next month — although capital returns to shareholders have been rumoured for months now. BHP and Anglo are more promising than Rio, which announces half-year results on 7 August. I believe that Rio stock is properly priced at this level.