Trump’s tariffs heighten risks at this miner – but that’s no reason to sell

A cheap hurricane season bolsters the thesis for this insurer

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The disposal of steelmaking coal assets for $1.1bn (£850m) is a positive step at mining giant Anglo American. It raises cash and buttresses the balance sheet, affirms management’s commitment to a leaner, simpler structure by selling assets and shows there is value within the non-core portion of the operations.
It could make the company a more tempting takeover target, even if BHP continues to assert it will not return with a fresh approach. As such, we are happy to stick with the stock.
Anglo American is looking to focus on copper, iron ore and potash, and de-emphasise coal, platinum group metals, diamonds and nickel. Further disposals could be the next positive catalyst for the share price, and Duncan Wanblad, the chief executive, is committed to shedding the remaining steelmaking coal assets.
The risk lies in wider economic weakness and lower commodity prices. The election of Donald Trump in America is boosting the dollar, which is traditionally seen as negative for raw materials as they are quoted in the US currency and thus become more expensive.
Trump’s triumph is also raising worries about tariffs and global growth, where softness could hit demand.
However, our lowly in price purchase at barely net asset or book value, will hopefully provide us with downside protection, as well as upside potential.
Questor says: BuyTicker: AALShare price: 2326.5p
In crude terms, there are three ways in which a stock can generate positive returns over time: higher earnings lead to capital gains, as the “E” in the price-to-earnings calculation rises; a higher multiple, or valuation, as the “P” in the price-to-earnings calculation goes higher; and dividends or buybacks.
Alongside last week’s third-quarter update, Lancashire, Lloyd’s of London’s syndicate manager, declared a special dividend of $0.75 a share (58.3p) to take our total return from the insurance and reinsurance specialist upon receipt on Dec 13 to $2.325, or just over 183p, a share. That equates to 28pc of the purchase price and supplements a modest 5pc capital gain.
News that this year’s hurricane and storm season is expected to cost a relatively modest $130m to $140m is further testimony to the company’s underwriting and risk management prowess, as this is not enough to materially affect combined ratio and profit expectations for this year (at least so far).
Buoyed by further growth in premiums, Lancashire therefore looks capable of adding to its excellent dividend record over time and providing both income and capital returns.
Questor says: Buy
“No matter how beautiful the strategy, you should occasionally look at the results.” Wise words from Sir Winston Churchill.
In the case of Smith & Nephew, the orthopaedics, wound care and sports medicines specialist, this unfortunately means giving up on the stock and accepting a book loss of around a third. It is only partly mitigated by nearly 120p per share in dividends, including the payment received on Nov 8.
Another disappointing trading update – and another downgrade to earnings forecasts – means our investment thesis is just not playing out.
We had assumed that orthopaedic surgical interventions would recover strongly in volume terms on the end of the pandemic, and that efficiency and productivity programmes would then see the FTSE 100 member generate maximum benefit from the additional volumes.
The expected margin expansion would then see the shares re-rate, as investors attributed a higher multiple to the stock and closed up the valuation gap relative to US peers – or so the theory went.
But it just is not happening, despite the new profit margin goals and 12-point plan launched by Deepak Nath, its chief executive. Mr. Nath has had to trim sales growth forecasts for 2024, this time due to weakness in China, and shave margin expectations lower for the year as a result, down to 17.5pc from a prior steer of “at least 18pc”.
Management is sticking to its goal of a margin of 19pc to 20pc in 2025, and this implies a strong advance in earnings. But after a slew of turgid updates, the market is not going to price this in until the numbers are delivered, if they ever are delivered.
This means the stock feels like dead money at best, so we shall move on. In doing so we accept the danger that either activist investor Cevian uses its 5pc stake to prompt a shake-up (or break-up) or a predator appears.
Questor says: Sell
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