After a 2009 to forget, 2010 was quite an improvement for Anglo American. Not that investors have given the diversified miner too much credit.
Just over a year ago, Anglo rejected a merger offer from Xstrata, arguing the company would be better off if left alone. Since then, there has been progress, including significant obstacles being overcome in December at Anglo's major iron-ore project in Brazil, Minas Rio. Heavily over-budget, the mine is at least now on track to start production in 2013. With major copper and nickel projects expected to start production next year, Anglo should be second only to Xstrata among major mining companies in terms of production growth out to 2013, Liberum Capital forecasts.
These positive signs haven't been enough for Anglo's investors. Though the company's shares rose by 23% in 2010, Xstrata's were up 34%, while Rio Tinto and BHP Billiton's London-listed shares were up 32% and 28%, respectively.
The underperformance of Anglo's London-listed stock stems from concerns over its exposure to South Africa's uncertain business environment through its Johannesburg-listed subsidiaries, Anglo Platinum (Amplats) and Kumba Iron Ore, as well as unlisted diamond miner De Beers.
Nonetheless, when the different parts of Anglo are disaggregated, Amplats and Kumba together account for around half of Anglo American's overall market capitalization because of their relatively high share prices in South Africa. In turn, this means the other parts of Anglo—which have been performing better in earnings terms and include copper iron ore and nickel businesses—look undervalued. Credit Suisse estimates this 'rump' part of Anglo trades at a price/earnings ratio of 5.9 times, a 50% discount to the company's U.K.-listed peers. Divorcing the South African assets from the rest of the business might, then, seem to make sense in order for Anglo to unlock its full value.
The counter-argument is that having gone through a process of cost-cutting, Anglo's underperforming businesses like Amplats deserve time to prove their worth, particularly if platinum-group metal prices strengthen, as many expect.
Anglo shareholders are being asked to show more patience. A poor 2011, though, could force Anglo into another round of corporate surgery.