Broker snap: South Africa issues dim appeal of Anglo American

4th Nov 2010 12:12

Panmure Gordon sees South Africa as an increasingly less attractive mining destination and no longer rates Anglo American shares as worth buying.According to the broker's calculations, the $237m cost savings achieved by Anglo American from asset optimisation has been outweighed by the mining giant's costs for the first half.Analyst Alison Turner estimates that South African "cost pressures, new mining royalties, compliance with the mining charter and production lost to labour and safety incidents cost Anglo American $391m" in the first half of 2010.Also, the broker sees decreasing security of tenure over mineral rights, the growing threat of nationalisation, combined with a stubbornly strong rand as reasons not to buy at Anglo.Despite rising political risk and inflationary pressures, the rand remains strong "with investors chasing yield".The broker has adjusted its discounted cash flow valuation of the group's South African operations by 14%, giving a "risk-adjusted valuation" of 2,756p for Anglo's shares, down from 3250p previously. The stock has been downgraded from a "buy" to a "hold".