We are raising our fair value estimate for Anglo American (AAL) to £2.30 per share from £2, as the company received a more favourable sales price for its niobium and phosphate assets compared with our attributed value. Anglo’s financial leverage magnifies the impact of the incremental value on our residual equity fair value estimate. Still, with the rally in shares over the past two months from a low of £2.20 in January to more than £7.50 today, we believe Anglo American shares remain overvalued.
We see considerable downside as cash flows from its iron ore, coal, and copper businesses continue to decline with commodity prices. Anglo American announced yesterday that it reached an agreement with China Molybdenum to sell the niobium and phosphate assets for $1.5 billion in cash. These assets had generated just $146 million of earnings before tax in the previous year, split approximately equally between the two businesses. The sales price implies a valuation multiple of approximately 10 times earnings before tax, higher than the 6 to 7 times we believe is the asset is worth.
We value the niobium assets in line with Anglo American companywide cash flows at 5 times earnings before tax and the phosphate assets at 8 times EBITDA. This sale is one of the largest that Anglo American has done recently as it looks to divest noncore assets to focus on copper, diamonds, and platinum. The company continues to look to offload its coal and iron ore businesses
Investment Thesis
As China rebalances away from infrastructure and construction-led growth, long-lagging Anglo American will find itself better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, about 40% of revenue, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.
Anglo's huge platinum business should benefit as rising household incomes bolster Chinese demand for automobiles and jewellery, categories that collectively account for 84% of platinum and palladium use in China. However, persistent problems related to labor, geology, and electricity in South Africa, which have weighed on profits in recent years, threaten to limit the upside.