Morningstar | Commodity Price Cycle Maturing for Anglo American, FVE Retained
We maintain our GBX 1,120 per share fair value estimate for no-moat-rated Anglo American. Adjusted first-half 2018 net profit of USD 1.6 billion was 2% ahead of first-half 2017 but below our expectations. We've lowered our full-year 2018 earnings forecast by 14% to USD 2.66 per share as a result. Cost inflation continues to emerge. Adverse currency and inflation movements reduced first-half EBITDA by approximately USD 0.4 billion or 9%. The outage from the Minas Rio pipeline failure also detracted from EBITDA by USD 0.3 billion. Depreciation was higher than expected, reflecting a greater proportion of output coming from new mines. Increased depreciation forecasts mean our longer-term earnings forecasts are lower. We now expect midcycle earnings of USD 1.01 per share, down from USD 1.19 per share previously. However, our longer-term expectations for operating and investing cash flows are little changed, hence the unchanged fair value estimate.Anglo American remains focused on cost efficiencies and productivity. In aggregate, Anglo American says it has improved its average position on the various cost curves from the 52nd percentile in 2013 to the 46th percentile in 2018. In part, this also reflects changes in the portfolio. Overall, Anglo American, on average, still sits close to the middle of the respective industry cost curves and while positive, we don't think the changes significantly alter the firm's competitive position.
On an adjusted basis, we forecast Anglo American to earn its cost of capital in 2018, but still expect midcycle adjusted returns on invested capital, or ROIC, to be below the firm's cost of capital. Adjusted ROIC is after adding back the approximate USD 21 billion of net impairments to the written down value of invested capital of USD 31 billion. Excluding the adjustments for past net impairments, we forecast an unadjusted ROIC of approximately 15% in 2018, reflecting the current cyclically favourable conditions.
Free cash flow after minority dividends declined to 33% to USD 1.9 billion due to once-off positives in the first half of 2017 and the restart of dividends to minority interests in 2018. Despite this, the balance sheet continues to strengthen and is in robust health. Net debt halved from a year ago to USD 3.4 billion while annualised net debt/EBITDA sits at a comfortable 0.4. The interim dividend increased 2% to USD 0.49 per share, reflecting an unchanged 40% payout ratio relative to underlying earnings. We expect the payout ratio to rise to 50% in 2019 in line with the improving financial position which should facilitate a greater proportion of earnings is returned to shareholders.
Management attention is slowly turning towards growth and we think this is a natural evolution for the industry given the maturity of the cycle. Anglo American has agreed to a couple of small acquisitions in diamonds and platinum, but both are relatively long-dated options and not yet impactful to our fair value estimate. If prices remain stronger than we expect in the medium term, it is likely the industry will start to meaningfully increase its expenditure on exploration, the development of new mines and potentially acquisitions.
Anglo American is a global mining company with a portfolio of mining operations and undeveloped resources. Co. is focused on diamonds, copper, platinum group metals (PGMs), and bulk commodities and other minerals. Co.'s segments include: De Beers, which produces rough and polished diamonds; Copper, which produces copper; Platinum, which produces PGMs; Iron Ore and Manganese, which produces iron ore, manganese ore and alloys; Coal, which produces metallurgical coal and thermal coal; and Nickel, which produces nickel.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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