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FTSE 100 mining giant Anglo American (LSE: AAL) is down 38% from its January high.
The key reason for this is the ongoing slump in commodities prices. And the key reason for the slump is China’s economic growth momentum.
For decades, China sustained the commodities ‘super cycle’, characterised by consistently rising prices. This resulted from huge Chinese demand to power its economy but a lack of indigenous supplies.
However, at this stage, there are two key points for smaller investors to understand, in my view.
The first is that data out of China is very difficult to interpret correctly and many analysts get it wrong.
The second is that by the time it is shown to be wrong, it will be too late for smaller investors. The smart money will already have bought commodities at bargain prices and mining stocks too.
Now is the time to get into the mining sector, it seems to me. And to soften any discomfort before the turnaround in commodities prices, Anglo American offers great shareholder rewards.
China’s economy is growing
On 17 July, China’s Q2 GDP release showed economic growth increased by 0.8% compared to the previous quarter.
This was better than consensus analysts’ expectations of a 0.5% increase. But analysts focused on the unfavourable comparison to the 2.2% increase recorded in Q1.
What many of them fail to fully appreciate is that on a year-on-year basis, economic growth expanded by 6.3% in Q2. This compared to 4.5% in Q1.
They also fail to adequately factor into their calculations that Chinese President Xi Jinping is targeting economic growth of over 5% this year. And if that is what he’s aiming for, China get there, whatever it takes to achieve.
What does this mean for the shares?
Anglo American is the world’s largest producer of platinum, with around 40% of world output. It is also a major producer of diamonds, copper, nickel, iron ore, and coal.
China has been a big buyer of all these commodities since the mid-1990s. Iron ore is used to make steel — key to its infrastructure buildout.
Platinum is a core component in catalytic converters — in demand in China’s energy transition business. Analysts’ predictions are for prices to rise to $1,200 per troy ounce by 2025, from around $990 currently.
Copper also plays an essential role in Chinese computers, smartphones, electronics, and other appliances. Analysts’ predictions are for prices to rise to $15,000 per tonne by 2025, from around $8,400 now.
Excellent shareholder rewards
In Anglo American’s preliminary 2022 results released on 23 February, it paid a $0.9bn final dividend. This was equal to $0.74 per share and — crucially — was consistent with its 40% payout policy. In 2021, it paid out 7.5%, in 2020 it paid 3.2%, and in 2019 it paid 4%.
The key risk I see here is that China’s economic recovery genuinely does falter. This would mean demand for commodities staying lower for longer and prices staying lower too.
However, I expect the company to recoup all its share price losses in the next 12 months, subject to market conditions. If I did not have holdings in companies in the sector then I would buy the shares now, without hesitation.
