Broker snap: Anglo American needs shake-up, says Credit Suisse

18th Feb 2013 11:06

Analysts at Credit Suisse said Monday they expect Anglo American's net debt to climb, providing limited options for growth for incoming Chief Executive Officer Mark Cutifani.The broker explained that the group's levels of capital expenditure (capex) are still increasing and are now greater following raised capex guidance from management, while free cash flow is negative despite operational improvement across the mining company and an improved earnings forecast for this year. Hence the increase in debt levels and the limited scope for new projects. The company raised its guidance on capex for 2013/2014 to between $7.5-8bn and $6.5-7bn, whereas the broker had previously modelled $6bn and less than $5bn, respectively."Without a more fundamental shake up of the business shape (e.g. stake sales, mergers and acquisitions), in our view the value case for Anglo American remains elusive and long dated," Credit Suisse stated as it reiterated its 'neutral' rating and £21 target price.They go on to explain that "with volume growth (primarily from Minas Rio, but also coking coal and copper) together with margin improvement within the later cycle platinum and coal operations, we estimate earnings per share could increase by 50% (against 2012 underlying of $2.24) over the next 2-3 years to over $3 per share, which would place it on 10-11x price-to-earnings multiple, still at a premium to peers."The statement comes after the FTSE 100 company last week recorded a loss before tax of $239m, compared with a profit of $10.78bn the year before. The firm took an impairment worth $4.0bn (post-tax) in relation to its Brazilian Minas-Rio project, which was found to need $8.8bn more in capital expenditure after a detailed cost and schedule review. Lastly, and following on from all of the above, the Swiss broker also sees limited capacity to rebase the dividend this year and next despite the company's commitment to shareholder returns.RD