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Analysts cheer Anglo American value, assess implications of £2B Agarwal buy

Analysts have cheered Anglo American Plc as the "deepest" and "most compelling" value opportunity among the major diversified miners, after Vedanta Resources Plc founder and chairman Anil Agarwal launched a scheme to buy £2 billion, or some 12%, of the miner's stock.

The billionaire's vehicle Volcan Investments Ltd., which is a 69% majority owner of Vedanta, plans to buy the Anglo American shares via a combination of on-market purchases and a convertible bond by April 11.

In a March 16 note, Investec said Anglo American offered the deepest value among the major diversified mining companies but was "considerably undervalued" relative to its peers.

"Agarwal is, in our view, recognizing the deep value in Anglo," analyst Hunter Hillcoat wrote. "Looking at our NAV for the Anglo assets — based on [net present value] for unlisted assets and the latest share prices for Kumba Iron Ore Ltd. and Anglo American Platinum Ltd. — we see the rump value (i.e. unlisted assets) valued at [circa] 38% of what we estimate as fair value for these assets, a discount that we believe is too low."

"Indeed, at various stages in the past month, as the value of the listed assets appreciated, this discount has been as deep as 50%."

Last month, Investec upgraded Anglo American to a buy rating with a target price of 1,706 pence per share, compared to its March 16 closing price of 1,297 pence per share.

"We have been rapidly approaching the M&A stage of the current resources cycle, particularly given the current high cash generation, but this is the first clear signal that corporates are seeing value that the market is not," Investec added.

A same-day note by RBC Capital Markets took a similar stance, suggesting that Agarwal's move should boost a re-rating of the shares, which it described as the most compelling value opportunity among the diversified miners.

"[W]e would expect the market will see this as adding an element of future potential corporate activity premium into the shares," analyst Tyler Broda commented.

The announcement initially fueled speculation that the Indian billionaire might attempt a tie-up with the mining major, in line with comments made about a potential merger between Anglo American and Vedanta subsidiary Hindustan Zinc Ltd. at last year's World Economic Forum in Davos. However, Volcan Investments pointed out that the latest move was a personal investment by the Agarwal's family trust, not a prelude to a takeover.

Nonetheless, market observers widely agreed that the strategic 12% stake will provide Agarwal a powerful position to have a say in the future evolution of Anglo American.

A team-up with the company's main shareholder, South Africa's Public Investment Corp., could potentially even "block any other corporate activity," according to RBC.

Bernstein considered it likely that Agarwal is eyeing a seat on the company's board, enabling him to influence corporate activity, "including Anglo American's attempts to exit a significant chunk of its South African exposure."

"Of course, it is this African exposure that he is looking for, and a board position would put him in a significant position to push for Hindustan/Vedanta to be the owners of that," the team around analyst Paul Gait flagged March 16.

"We believe that, politically, the fact that Hindustan Zinc has net cash of [circa] US$3.8 billion is particularly advantageous in terms of any acquisition of South African assets, with the government extremely unlikely to permit any such acquisition to result in debt being loaded onto those assets."

In light of strong zinc prices, Bernstein speculated that Agarwal could be looking to put Anglo American "into play" to flush out any other potential bidders.

"One potential line of thought could come from the fact that a tie-up with Anglo American, and with Vedanta's ability to develop [the] Gamsberg zinc project in South Africa, might Glencore Plc see that as enough of a threat to its control of the zinc market to launch a counter-bid?"

"With many opportunities being taken out in [the] consolidation period as commodity prices soared, we have long reiterated our view that Anglo American represents one of the very few potential large-scale, and desirable, takeover targets in the mining industry," the Bernstein analysts noted. "It seems we are finally seeing that view manifesting itself from other industry players as well."