When a blue-chip stock goes on a fire sale, it brings to mind one of Warren Buffett’s most famous quotes: “Price is what you pay; value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”.
The quality merchandise in this case is FTSE 100 mining giant Anglo American (AAL). In three days, the stock has lost a fifth of its value. Two factors have precipitated this sell-off: 1) disappointing Q1 production figures 2) fears of an economic slowdown as China re-enters a lockdown.
However, when assessing whether a stock is a worthy addition to my portfolio, I tend to ignore such background noise. Instead, I look at the underlying fundamentals of the business together with its long-term prospects.
Lowered guidance
In its Q1 production report, Anglo American reported a fall in production of 10% compared to the same period in 2021. Weather-related issues, Covid-induced staff absences, and mining operational challenges were the main reasons for the fall.
As a result, it lowered volume guidance for three commodities in its portfolio: platinum group metals (PGMs), iron ore, and metallurgical coal. This is significant, because the first two commodities account for two-thirds of group earnings before interest, taxes, depreciation, and amortisation (EBITDA).
Anglo American also reported significant cost increases driven by inflationary pressures. This was most pronounced in diesel prices which power its mine vehicles. However, the business is making concerted efforts to reduce its reliance on fossil fuels. For example, it has recently begun using electric shovels at its copper mine in Peru.
Macro trends
The most significant driver for me to invest in Anglo American relates to the wider macro environment. Predominant here is climate change. As the world moves toward more renewable sources of power generation, together with the electrification of transport, so will demand for many of the metals which Anglo American produces soar.
Iron ore, which is the main constituent of steel, is likely to be in high demand throughout this decade. The US government has earmarked billions of dollars in infrastructure projects as a means of stimulating economic activity. In the UK, we have the levelling up agenda in the north of England.
I also believe that we are in a midst of a trend toward deglobalisation, driven by factors such as the evolving geopolitical landscape. If so, then we can expect to see an acceleration in manufacturing in developed economies. This will require a huge investment in non-residential construction.
Dividend policy
In 2021, Anglo American returned $6.2bn to shareholders through dividends and buybacks. This equated to 499 cents a share. At today’s share price, that comes to an impressive total yield of 11.8%.
The company has a base dividend policy of returning 40% of underlying earnings to shareholders. However, given the elevated price levels across many of the metals and materials that the company produces, I would not be surprised to see it continue to issue special dividends on top of this base in the future.
Overall, I think the sell-off in Anglo American has been completely overdone. The long-term tailwinds are good for its prospects, and the bumper returns to shareholders point clearly in the direction of this being the beginning (not the end) of a commodities bull market. I will be buying.