Today I am looking at whether Anglo American (LSE: AAL) could be considered a terrific stock for growth hunters.
Dragged over the coals
The worsening problem of oversupply in commodity markets continues to hit mining play Anglo American particularly hard, the firm finding no quarter in its diversification across many markets. The business saw underlying operating profit rattle 10% lower during January-June to $2.9bn, with slippage reported everywhere bar copper and nickel.
Most worryingly, the firm witnessed enduring woes at its massive global coal business, and operating profit collapsed a quarter to $280m during the period. This prompted the business to put its Canadian Peace River project on care and maintenance earlier this month, and further mothballing across other assets cannot be ruled out.
Indeed, Anglo American chief executive Mark Cutifani told The Sydney Morning Herald recently that he expects further mine closures across the industry at a rate of “once every two or three weeks” while chronic oversupply persists.
And Cutifani advised that he expects hard coking coal spot prices — which were recently at $120 per tonne — to maintain extreme pressure across producers’ bottom lines while remaining under the $150 mark.
With Bank of America-Merrill Lynch forecasting prices to remain subdued at $135, $140 and $145 per tonne for 2015, 2016 and 2017 correspondingly, profits at Anglo American look set to remain under the cosh for some time to come.
Bargain price reflects risk profile
The effect of macroeconomic turbulence and floods of new material across key commodities has caused Anglo American’s earnings to shake wildly in recent times, the firm having sunk into the red during the past two consecutive years.
And City analysts see no remedy on the horizon in the immediate term, and expect a further 14% earnings fall in 2014, to 179 US cents per share. However, a striking 18% rebound is anticipated for the following 12-month period, to 210.9 cents.
It could be argued that these projections make the mining giant a terrifically-priced stock pick, with a P/E multiple of 12.8 times prospective earnings for this year collapsing to just 10.8 for 2015, just above the yardstick of 10 times or below which represents stunning value.
Still, I believe that these low valuations rightfully underline Anglo American’s position as a high-risk bet, like most of those within the mining sector.
Undoubtedly the effect of massive cost-slashing is expected to improve the firm’s earnings potential in the medium term. But as conditions in Europe continue to slide and Chinese economic growth cools, the consequences for commodity prices look set to punish revenues profiles across the mining sector.