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Morningstar | Anglo American's Exposure to Iron Ore and Coking Coal Sees the Shares Overvalued

As China rebalances away from infrastructure and construction-led growth, long-lagging Anglo American is better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds (about half 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 platinum business should benefit as rising household incomes bolster Chinese demand for automobiles and jewelry, categories that collectively account for roughly 80% to 90% of platinum and palladium use in China. However, in the longer term, electric vehicles are likely to satisfy a greater share of demand for vehicles, weighing on demand for platinum and palladium for catalytic converters.An 85% stake in De Beers makes Anglo the world's largest diamond miner. As with platinum and palladium, there's big upside to Chinese diamond demand, which now stands at about 10% of the global total. Realizing that upside will take more than rising Chinese incomes, as diamonds lack the cultural resonance they have in the U.S., maximizing Chinese diamond demand will come down to marketing. If Chinese brides come to view diamond engagement rings as a must-have like their American and Japanese counterparts did in the 20th century, diamonds have tremendous upside.Anglo has rapidly repaired its balance sheet and is now moving toward returning funds to shareholders. Net debt at end 2018 was less than USD 3 billion. The company focused on driving productivity, targeting USD 3 billion-USD 4 billion of cost and volume improvements between 2018 and 2022. Incremental expansion of existing operations to drive capital and operating cost efficiency is the primary focus. Large-scale growth projects are a medium- to longer-term proposition, though we expect the company's appetite to improve, given improved financial strength.