I’ve come close to buying Anglo American (LSE: AAL) a few times in my investing career, but there’s one thing that’s always kept me sufficiently unsure that I’ve never done it. I’ve certainly missed out in recent years, as the Anglo American share price has been on a tear.
Over the past two years, evening out the Covid-19 effect, AAL shares have gained 28% while the FTSE 100 is still down 8%. And looking back over five years, the price has soared by more than 250%. So why have I turned my nose up at this mining giant? Well, to answer that, I need to look back over the longer term.
They might be storming ahead now, but Anglo American shares have still only just regained the kind of levels they enjoyed as far back as 2010. And back in 2008, the price was higher still. So that’s the thing. The mining and minerals business is notoriously cyclical, and stock prices can be fiercely volatile.
Price and dividend volatility
The sector often provides decent dividends, which can help as a buffer against a choppy Anglo American share price. But they can be erratic too. And they rarely seem to beat the kinds of yields I can get from stocks with a lower white-knuckle factor. That doesn’t mean private investors can’t do well from Anglo American, because clearly there are profits being made and distributed.
On that front, July’s Q2 production report looks good. Anglo was only slightly hampered by the pandemic. According to chief executive Mark Cutifani, the company “generally maintained operating levels at approximately 95% of normal capacity.” He added that “as a consequence, production increased by 20% compared to Q2 of last year.”
The biggest increase has been a 134% jump in rough diamond production. AAL does own De Beers, so it has a lot of that market sewn up. Platinum group metals production is also up nicely, by 59%. The only notable drop was in metallurgical coal, which dipped 25%.
Anglo American share price valuation
So how would I rate AAL shares today on the valuation front? We’re looking at a trailing P/E of close to 24. The full-year production outlook for the firm does look decent. And commodities prices have been strengthening nicely. So we could see decent earnings growth bringing that multiple down for 2021.
But that still leaves the required judgment beyond me. I can’t get past the thought that successful mining investors need to get the valuation and timing right. Looking back at the Anglo American share price chart, there are few times when I would have been successful. I just don’t have the skills needed for any kind of timing attempts, even long-term cyclical ones.
If we were looking at a business with a multi-decade upwards trend on top of shorter-term cyclical moves, I might once again consider buying Anglo American. But with the 21st century record that I’m seeing, I’ll continue to watch from the sidelines.