Morningstar | Raising Our FVE to GBX 1,120 per Share on Currency and Commodity Prices. See Updated Analyst Note from 23 Jul 2018
We raise our fair value estimate for no-moat Anglo American by 8% to GBX 1,120 per share. About half of the increase reflects depreciation in the British pound/U.S. dollar exchange rate; the rest is due to minor increases in near- to medium-term commodity price assumptions. The thermal coal price has outperformed expectations with strong demand from Asia and supply constraints. Supply has been weaker, mainly on restrictions on domestic production in China. Domestic supply in India has also been outpaced by demand, increasing import demand. We have raised our near-term metallurgical coal prices to a lesser extent, and the nickel spot price appreciated somewhat in the June quarter, while the decline in the price of platinum and the increase in palladium were, on balance, a small negative.After the June quarter, Anglo American is largely on track to meet its 2018 production guidance. Platinum production guidance has increased marginally to 2.4 million-2.45 million ounces from 2.3 million-2.4 million ounces. Anglo’s expected output for diamonds, copper, metallurgical coal, nickel, and palladium is unchanged. The commodities where guidance is maintained or increased make up about 75% of forecast 2018 revenue and operating profit. The headwinds are at Kumba, where guidance is down 2% to 43 million-44 million tonnes of iron ore and export thermal coal is 3% lower at 28 million-30 million tonnes.
The key point of weakness in 2018 remains the Minas Rio iron ore mine in Brazil. The mine is still suspended following leaks in the ore slurry pipeline. After year-to-date production of 3.2 million tonnes of iron ore, Anglo American still expects no meaningful additional output this year, with 4 kilometres of pipeline to be replaced by end 2018. Initial guidance was 13 million-15 million tonnes and the stoppage is expected to reduce EBITDA by USD 300 million-400 million. Fortunately for Anglo, relatively strong commodity prices through 2018 have so far more than compensated.
Our earnings forecasts are now USD 3.09 per share in 2018 and USD 2.57 in 2019 versus USD 3.03 and USD 2.23 per share previously. We have raised our nominal thermal coal price forecasts by 17% to USD 95 per tonne in 2018, 14% to USD 80 per tonne in 2019, and 16% to USD 70 per tonne in 2020. Our long-term forecast remains USD 61 per tonne from 2021. For metallurgical coal, we have increased our 2018 forecast by 3% to USD 200 per tonne, 2019 by 17% to USD 140 per tonne, and 2020 by 10% to USD 110 per tonne in nominal terms. Our long-term forecast remains USD 90 per tonne from 2022. We now assume nickel price of USD 6.29 per pound, up 4% from USD 6.06 per pound, reflecting spot appreciation in second-quarter 2018. We also now assume a 7% higher platinum price of USD 844 per ounce and a 7% higher palladium price of USD 955 per ounce, in line with recent changes in spot prices.
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