Anglo American will rise as near-term risks ease, says Jefferies

Jefferies has reiterated its ‘buy’ rating on Anglo American, arguing the near-term risks are being overplayed and have left the blue chip miner looking increasing undervalued.

According to the bank, the main risks currently facing Anglo American are potential land reforms in South Africa, changes to empowerment ownership requirements following the 2018 South African mining charter and a correction in palladium and rhodium prices.

Also weighing on the stock are potential challenges in obtaining the final license for the Minas Rio dam.

But Jefferies said: “Uncertainty regarding these issues should be resolved soon as South African elections are scheduled for May, and policy clarity should follow. The correction in PGM prices should play out relatively quickly, and the Minas Rio license must be obtained by the year-end.

“Our discounted cash flow analysis indicates that there is long-term value in Anglo shares, even if we exclude its South African operations and Minas Rio from our model. We do not ordinarily lead an argument in mining with valuation, but in the case of Anglo, it is simply too compelling to ignore.

“If these shares do not perform well, a break-up of the company becomes a real possibility over the next two years, in which case the 34% upside to SOTP [sum of the parts] fair value becomes most relevant.”

Jefferies, which has a price target on Anglo of 2,500p, also pointed out that while rivals Rio Tinto, Glencore and BHP Billiton were generating strong free cash flow and “massive” capital returns, Anglo’s returns had been muted as the company upped investment and reduced net debt, with a dividend payout ratio also lower than its peers’.

But the bank added: “For investors looking for yield in mining, Anglo may not be to the top of the list, but there are clearly other reasons to own Anglo shares for the long run: copper growth, valuation, break-up potential.”