AJ Bell Youinvest Breaking the Mould – Anglo American production update

The main headline-grabber this week so far
as the news is concerned is likely to be the latest World Economic Forum in Davos, Switzerland
when politicians, central bankers and company bosses will get together to discuss the big
issues of the day. Frankly, I wouldn’t open the curtains if it was taking place in my
back garden and I’m not sure it’s of huge relevance, looking at it through the admittedly
narrow prism of financial markets. Of much greater import, in the near term at
least, are likely to the latest interest rate decisions from the Bank of Japan on Tuesday
21st January and the European Central Bank on Thursday 23rd, even if neither is expected
to alter interest rates. Lest we forget, the Bank of Japan’s headline borrowing rate
is minus 0.1% and the EBC’s is zero and neither seems in a hurry to tighten policy
and raise rates, with the result that this is unlikely to be the most exciting chart
that you have ever seen. Also remember that both the BoJ and the ECB
are running Quantitative Easing, or QE, programmes. Japan’s is running at ¥80 trillion a year
(the equivalent of £557 billion, more than the Bank of England has done in the last decade)
The ECB is buying bonds at the rate of €20 billion a month, having restarted QE last
September just as Mario Draghi stepped down and Christine Lagarde took the helm. Again, no change is expected in either policy,
though whether they are working or not remains open to debate. Inflation is below the 2%
target in both Japan and the EU and growth is pretty patchy for good measure – and
this despite the fact that the Bank of Japan’s bond purchases now equate to over 100% of
GDP and the ECB’s around 40% (the Bank of England’s QE scheme works out somewhere
between a quarter and a fifth). Make of that what you will. On the corporate front, we have a clutch of
results releases and trading statements from FTSE 100 and FTSE 250 firms due in the coming
week. They include Mining giant BHP Group on Monday 20th January Airline easyJet and retailers SSP and Dixons
Carphone on the 21st Luxury goods leader Burberry and software
specialist Sage on the 22nd Online fast fashion retailer ASOS on the 23rd And brewer to pubs group Marston’s the 24th But for all of those the name perhaps the
stock most capable of causing a fuss in the week ahead is miner Anglo American, which
will release a fourth-quarter production update on Thursday 23rd January. As we can see here shares in the diamond,
copper, coal, iron ore and platinum and palladium producer are up by nearly a fifth over the
past 12 months. That’s pretty good compared to the FTSE 100, which is up by around 10%,
and also the Bloomberg Commodity index, which has advanced by barely 5%, as we can see in
the next graphic: Like a lot of miners – and commodity prices
– Anglo American started the year badly but then rallied hard in the second half,
helped by hopes for strong economic growth in 2020, thanks in turn to central bank interest
rate cuts and US-China trade talks. In this next graphic, we can see how the headline
prices of Anglo American’s main outputs fared in 2019. Palladium and platinum were strong thanks
to power outages in South Africa and the after-effects of the diesel car emissions scandal, while
iron ore rallied after a mine accident in Brazil took a lot of capacity out of the market,
at least temporarily. Copper gained in the second half thanks to hopes for an upturn
in China but coal and diamonds were weak, with coal suffering at the hands of gathering
environmental concerns and calls for more concerted efforts to move away from fossil
fuels. This update will be important as Anglo American
comment on production growth for 2019. Remember that at the nine-month stage stage: Metallurgical coal was up 2%, with a 22% surge
in Q3 Copper was down 1%, after an 8% drop in Q3
Platinum was down 1% Palladium was broadly flat
Iron ore was down 7% after a flat third quarter Thermal coal was down 10% after an 18% drop
in Q3 And diamonds were down 12% Mr Cutifani may also comment on the other
performance targets that he has laid out: Total unit cost reductions of 5% in 2019 Total production growth of 3% in 2020 as part
of a plan to boost total output by 20% to 25% by 2023, with the
Peruvian Quellaveco copper mine a Namibian diamond project
and the Aquila metallurgical coal mine in Queensland, Australia all key contributors The generation of between $3 billion and $4
billion of additional EBITDA – earnings before interest taxes depreciation and amortisation
– between 2017 and 2022. In 2017, by the way, EBITDA came to $8.8 billion on an underlying
basis, so that target implies growth of 35% to 45% On the strategic side of things, Mr Cutifani,
may comment on the putative bid for Sirius Minerals (SXX) and the ongoing $1 billion
share back scheme which is due to conclude by March. Alternatively, he may wait, at least
on the buy back until Anglo’s full-year results, which are due on February 20th. Thank you for watching and I look forward
to seeing you next time.

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