Are Anglo American shares now a top FTSE 100 buyout target?

Anglo American (LON: AAL) shares hit another 52-week low last Friday, falling to just 1,630p. Even having recovered to 1,825p today, the FTSE 100 miner has still lost more than 40% of its market value over the past year — leading to speculation that it could join the growing list of London-listed companies with a buyout target on its back.

For context, Anglo shares were last changing hands at these levels in mid-2020 when it was recovering from the pandemic-mini-crash. And the miner hit 4,170p as recently as April 2022.

Anglo American Performance Update

Anglo American’s trading update — released late last week — saw the company announce that capital expenditure will be cut by a significant $1.8 billion to 2025 as part of what CEO Duncan Wanblad called ‘improving our resilience’ within the tighter macroeconomic environment.

The FTSE 100 miner’s capex target for 2023 has been cut from $6 billion to $5.8 billion, with steeper cuts due in 2024. Despite the market reaction, it’s worth noting that Anglo is still investing in core projects, including the Woodsmith natural fertiliser mine in Yorkshire in addition to the Quellaveco copper mine in Peru.

However, further funding for Woodsmith after next year will be contingent on board approval — expected to be decided in early 2025. And looking to 2025, Anglo is planning capex of just $5.7 billion, compared to the previous $5.8 billion to $6.3 billion expectation.

While these cuts could see lower cash flow and perhaps smaller dividends in the future, arguably this cost discipline may stand the company in good stead through this higher rate environment. And it may be the first of many to cut back expenditure which was previously budgeted for in a lower rate, higher growth environment.

More positively, Wanblad also notes that ‘looking ahead, the fundamental supply and demand picture for many metals and minerals is ever more attractive. Many of the world's major economies are focusing their resources on meeting global decarbonisation timelines and, as the global population grows, continues to urbanise and demands higher living standards, we expect unprecedented demand for responsibly produced raw materials.’

In commodity terms, Anglo does have a more diversified asset base than its FTSE 100 compatriots. The company derives around a third of earnings from platinum group metals, and an additional 10% from diamonds. But both categories have been hit hard in 2023.

And perhaps the bigger problem is the cut to copper production guidance — especially when the metal is expected to see demand rise through the 2020s. In August, Anglo said it was planning on generating at least 910,000 tonnes of copper next year — but this could now be as low as 730,000 tonnes. And predicted output in 2025 will now be even lower than 2024 at between 690,000 and 750,000 tonnes.

FTSE 100 buyout target?

While a buyout may be some time off, Anglo American has seen circa £30 billion wiped from its market capitalisation since Wanblad took the reins in April 2022.

It’s underperformed other FTSE 100 miners for years and is set to face yet more problems this week as a South African court prepares to rule on whether a class action lawsuit concerning historical lead poisoning claims in Zambia can be brought against it.

It’s worth noting that consolidation in the face of rising costs has been a significant theme of 2023 — Allkem and Livent, BHP and Oz Minerals, Newmont and Newcrest, Glencore and Teck — and Jefferies analysts consider that if Anglo’s share price ‘continues to lag’ it could become part of the ‘broader trend of industry consolidation.’

The analysts note that Glencore-backed Xstrata (now fully part of Glencore) approached Anglo about a merger in the aftermath of the Global Financial Crisis, and argue that a merger today could be even more compelling than in the past due to ‘operating synergies, even greater marketing benefits, and a cost of capital arbitrage.’

And with the share price in the doldrums, this leaves Anglo American as a potential buyout target in 2024.

Past performance is not an indicator of future returns.