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FTSE100 mining giant Anglo-American (LSE:AAL) is down 38% from its January peak.
The main reason for this is the continuous fall in commodity prices. And the main reason for the crisis is China’s economic growth momentum.
For decades, China has supported the “super cycle” of raw materials, characterized by a constant increase in prices. This was the result of huge Chinese demand to fuel its economy, but a lack of local supplies.
However, at this point, there are two key points that small investors need to understand, in my opinion.
The first is that the data from China is very difficult to interpret correctly and many analysts are wrong.
The second is that by the time he is proven wrong, it will be too late for small investors. Smart money will already have bought commodities at bargain prices as well as mining stocks.
NOW it’s time to get into mining, I think. And to ease any discomfort before commodity prices turn around, Anglo American is offering handsome rewards to shareholders.
China’s economy is growing
On July 17, China’s Q2 GDP release showed that economic growth increased 0.8% from the previous quarter.
That was better than consensus analysts’ expectations of a 0.5% increase. But analysts focused on the unfavorable comparison to the 2.2% upside in Q1.
What many of them do not fully understand is that on an annual basis, economic growth increased by 6.3% in the second quarter. This compared to 4.5% in Q1.
They do not sufficiently take into account in their calculations the fact that Chinese President Xi Jinping is aiming for economic growth of more than 5% this year. And if that’s what he’s aiming for, China will get there, no matter what it takes to get there.
What does this mean for stocks?
Anglo American is the world’s largest producer of platinum, with around 40% of global production. It is also a major producer of diamonds, copper, nickel, iron ore and coal.
China has been a big buyer of all these raw materials since the mid-1990s. Iron ore is used to make steel – key to building its infrastructure.
Platinum is an essential component of catalytic converters, in high demand in the energy transition sector in China. Analysts forecast prices to reach $1,200 per troy ounce by 2025, from around $990 currently.
Copper also plays a vital role in Chinese computers, smartphones, electronics and other devices. Analysts forecast prices to hit $15,000 a ton by 2025, up from around $8,400 now.
Excellent rewards for shareholders
In Anglo American’s preliminary results for 2022 released on February 23, it paid a final dividend of $0.9 billion. This equated to $0.74 per share and, importantly, was in line with its 40% payout policy. In 2021 he paid 7.5%, in 2020 he paid 3.2% and in 2019 he paid 4%.
The main risk I see here is that China’s economic recovery is really running out of steam. This would mean that demand for commodities would stay lower for longer and prices would also stay lower.
However, I expect the company to recoup all of its stock price losses over the next 12 months, subject to market conditions. If I didn’t have stakes in companies in the industry, I would buy the shares now, without hesitation.