Despite weaker commodity prices, Anglo American (AAL) reported slightly improved operating results for 2013. Underlying operating profit rose to $6.6 billion from $6.3 billion, aided by a weaker South African rand, better production from two big copper mines and a full year of wholly consolidated De Beers.
Despite evidence of improving operational performance, we expect the next couple years to be challenging for Anglo from a cash-flow generation perspective. We expect prices for Anglo's two biggest earners in 2013, iron ore and copper, to decline through 2015. Weaker Chinese demand growth and resurgent supply are the common denominators to that view. We see cash from operations falling from 2013's $6.8 billion. Meanwhile, capital spending will consume $7.0 billion to $7.5 billion in 2014 - a record, as Anglo enters the stretch run on the long-delayed Minas-Rio iron ore project, and fade only slightly in 2015.
Longer-term, the cash generation picture brightens as Minas-Rio ramps, despite our expectation of lower iron ore prices, and capital spending falls. In terms of its portfolio mix, we continue to favour Anglo's long-term positioning relative to most peers. Specifically, Anglo's huge diamond and platinum businesses ought to fare comparably well as China rebalances to more consumption-oriented growth.
During the next several years, we believe the platinum and diamond businesses will drive an increasing share of total earnings growth. We expect these later-stage commodities to benefit from a shift toward consumption-led growth in China while earlier-stage commodities such as iron ore, metallurgical coal, and copper experience a marked slowdown in demand growth
Commodity price assumptions are the primary drivers of valuation of Anglo. Our fair value estimate of £16 per share incorporates the following key midcycle commodity price assumptions: copper at $2.79 per pound, platinum at $1,649 per ounce, thermal coal at $104 per ton, metallurgical coal at $179 per ton, and iron ore at $101 per ton.