Mining watch: Anglo and BHP risks in focus

<p>Investors are finding it difficult to discover many solid reasons to keep adding Anglo American and BHP Billiton shares, following their results on Tuesday.</p>

Investors are finding it difficult to discover many solid reasons to keep adding Anglo American and BHP Billiton shares, following results on Tuesday.

This tardiness partly relates to the fact that Anglo’s shares advanced almost 300% in 2016 on the back of a tough diet of operational slimming and leverage shedding, and BHP’s rose by a more moderate 60% due to similar actions.

As well, Anglo notes it succeeded in reducing net debt by 34% to $8.5bn in its financial year. That’s better than the group’s stated target of $10bn, though we have recently regarded the goal as more of a guide, particularly as Anglo has looked on track to hit it for months. The picture is similar in terms of attributable free cash flow and underlying core earnings (Ebitda), up from a negative result to $2.6bn in 2016 and improved by a quarter on the year before to $6.1bn respectively.

Shareholders appear to be treating news that Anglo wants to reinstate the dividend in similar fashion. After all, the return of regular shareholder pay outs would be the logical outcome from the group’s laudable improvement during the financial year and was also to be expected.

The stock settled a few pennies lower as investors opted to wait for more details to be released about the group’s intention to upgrade its mining asset portfolio, and the extent of advantages Anglo expects for financing costs, from a planned return to investment grade rating.

As for BHP’s half-year highlights, it reported underlying profit that is almost up 8 times year-on-year and a higher-than-expected dividend. It was telling that after all that, its own shares rose just 5.5p (0.4%).

In its case, arch rival Rio Tinto had already paved the way for a trend of rising pay-outs with its own bumper dividend and buyback package earlier in the month. At BHP too, productivity and free cash flow generation are up and net debt significantly reduced, as planned. The group continues to place the balance sheet front and centre though, and has remained cautious with respect to investments, even as it restates its “commitment to strong cash returns” and makes tentative new investments in exploration and project feasibility.

For both BHP and Anglo, the question in shareholders minds is ‘how sustainable is the pace of improvement?’ particularly with low hanging fruit in terms of costs and debt now largely out of the way.

For mining stock investors, especially those in BHP and Rio, the Escondida stoppages—which are having a production impact that the groups have yet to quantify—are a reminder of the multifarious environment of unpredictability miners operate in.

Particularly while miners’ recoveries are relatively recent, such outages and other unforeseeable factors pose risks to the continuing advance of their shares this year.

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