Is it time to get serious about Anglo American as it makes offer for Sirius Minerals?

Anglo American has made an offer to buy Sirius Minerals, it‘s a salutary lesson for Sirius shareholders, but is Anglo American now worth a look?

Article updated: 10 January 2020 11:00am Author: Michael Baxter

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Emotion and investing are not good bedfellows. It seems emotion has had a lot to do with the performance of the Sirius Minerals share price, the company had no less than 85,000 shareholders, many of whom lived in Yorkshire. Its appeal was that the company promised to bring great things to the North Yorkshire Moors, a potash mine no less. For those longing for a return to an era when Yorkshire (albeit South Yorkshire) was the centre of the world’s mining industry, it was hard to resist.

So the investors piled in. For many it was their only investment. And of course, holding a one company investment portfolio is akin to gambling. Just as importantly, the interest in the company pushed up the share price, to giddying heights.

Now Anglo American is looking to buy Sirius at 5.5p a share, meaning a valuation of £508 million. Actually, if you had bought into the company a few months ago, when negative sentiment was so strong, you would be sitting on a nice potential profit — that’s penny shares for you, a couple of pence on the share price can sometimes mean a doubling in profits. But if you had bought into Sirius in August 2016, when hype was at peak, you would be looking at a 90 per cent loss.

Sirius’s problem was raising money. It failed to secure a £500 million loan. It’s a shame that the money spent on its shares, which at one point gave it a market cap of around £3bn, hadn’t been invested into the company itself, rather than shares. If it had been, Sirius would have raised all the capital it needed to develop the mine. Maybe, a stock market listing was the wrong thing for Sirius. If instead those 85,000 investors had invested in a crowd funding campaign for Sirius Minerals, things would now be different, and it could now be looking at an IPO from a position of strength.

Anglo American, on the other hand, does have the resources.

The trouble, of course, with Anglo is its traditional base in coal mining. The headwinds facing the coal industry are so obvious that it is tempting to say the markets have already priced in the downside to Anglo’s coal exposure. But I don’t think so. The markets are still underestimating the risks of climate change and the speed with which renewables are falling in cost. (By the way, did anyone pick up on the irony this morning that while fires rage across Australia to such an extent that the smoke has now reached South America, the Australian stock market hit an all-time high.) The markets and the reality of climate change and shift to renewables are not, what one might call, aligned.

If coal does have long-term relevance it is for use in blast furnaces as coking coal, something Anglo has an abundance of.

But Anglo American is shedding its coal mining assets and diversifying. In addition to its potential ownership of Sirius and in due course a potash mine that could prove to be very valuable indeed, it is also building a copper mine in Peru. It’s also got mining interests in many areas including copper (in Chile), iron ore and platinum.

Anglo American’s fortunes go up and down with the commodity cycle. But Sirius projects that one day its North Yorkshire potash mine would be exporting £2.5bn of Potash a year, even for a company as large as Anglo American that would not be a trivial addition— pre-tax profits in 2018 were just over $6bn.

The company is also a big dividend payer.

If you still like the sound of the Sirius Minerals project, and the deal goes ahead, an investment in Anglo American might be an altogether safer way to gain exposure — but of course, safer means less potential upside. Even if the North Yorkshire mine one day more than fulfils its potential, it will be a nice little extra revenue stream for Anglo American, but it’s unlikely to ever be more than that.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

 

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Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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