Fund managers who invest in major mining companies need to make choices as to priorities of investment choices between the various players. A particular case which many fund managers may have been looking at recently is that between Anglo American and BHP Billiton – particularly relevant in South Africa where these two mining giants are the two largest constituents of the Johanneburg Stock Exchange. And, in principle, what applies in South African investment terms is valid elsewhere too.
Recent unit trust data shows that South Africa’s mining fund managers were divided over which of the JSE’s two largest and most liquid companies offered better value at the end of the year. But Cadiz analyst Peter Major says the decision should have been obvious, given how much cheaper BHP Billiton was when compared with Anglo American.
Of nine resources funds listed on the website of unit trust supermarket Equinox, only two had an overweight position on BHP Billiton. Two were overweight Anglo American and five were sitting on the fence, with less than 2% difference in weighting between the two stocks.
Since the end of the year, BHP Billiton has outperformed Anglo American by 12%. Cadiz analyst Peter Major describes the move between the two extremely liquid companies with such similar assets as extremely rare. He says the difference in valuations between the two companies in December was a “hedge fund manager’s wet dream”.
“At the end of the year, everybody was talking about making the switch from Anglo into Billiton,” said Major. “But there is a big difference between talking and doing.” He suspects that some fund managers may have been slow to act on their convictions, even though it would have been very easy for them to do so, with Anglo and BHP Billiton being as large and as liquid as they are.
Today, making the call between the two companies is less easy, reckons Major. But he’d still back BHP Billiton over Anglo on a one-year view.
“You could say that Anglo has platinum, which is doing well, and that Billiton has oil, which is a dog,” says Major. But he takes the view that platinum prices could cool, and he doesn’t see the oil price dropping much further.
Major also says that Anglo American subsidiary company Anglo Platinum will have to give some value away when it complies with government pressure to improve its black economic empowerment credentials. He expects Anglo’s new CEO Cynthia Carroll to resolve this issue within the next year.
None of the nine fund managers was prepared to weight either Anglo American or BHP Billiton less than 5% of total assets.
Major says that two of the biggest problems afflicting fund managers are lethargy and an unwillingness to deviate too far from an index.
On a historic price:earnings (PE) basis, Anglo American’s multiple of 20 times does appear more expensive than BHP Billiton’s 10.4. However, the company is expected to grow its earnings substantially, as indicated by its forward PE multiple of 12.8 times, compared with BHP Billiton’s 9.2.