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Anglo American’s palladium jackpot

Tom Stevenson

Tom Stevenson - Investment Director

The big winners in the California gold-rush, legend has it, were not those panning for the precious metal but the clever suppliers of the picks and shovels they needed and the hard-wearing blue jeans they typically wore. Hello Levi Strauss.

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The story of Anglo American, the mining conglomerate, is a kind of latter-day picks and shovels story focused on clean vehicle emissions. Anglo has seen its shares soar in the past few years and one of the key reasons for its recovery is palladium, the hottest story in commodities today.

Palladium is a key component of the catalytic converters used to scrub clean the emissions from petrol engine cars (diesel uses platinum, another Anglo product). As regulation has tightened (particularly in China), demand for the metal has increased. It has exceeded supply for some time.

That has unsurprisingly seen the price of Palladium soar. Four years ago, it was $500 an ounce. Today it is $2,500, more expensive than gold. The rise has prompted some to question whether the exhaust systems of old Prius cars might not be worth more than the vehicle itself. Thieves have noticed the opportunity and so-called ‘catlocks’ to protect cars’ undercarriage are selling well.

Also unsurprisingly, the price of Anglo American’s shares (it is one of the world’s biggest producers) has also rocketed. Over the same period, the shares have risen from just over £2 to more than £20.

There’s a lot more to Anglo than precious metals. It also mines copper, nickel, iron ore and coal. This week it agreed a takeover of a fertiliser mine in, of all places, the North York Moors. But it is the palladium and platinum play that has ignited speculative interest in the shares.

Anglo American is not for the faint-hearted. Its shares were worth £35 just before the financial crisis sent them plunging. Even after its ten-bagger rally since 2016, it is well below its peak.

But it still trades on a sensible multiple of earnings (about 11) and offers shareholders a decent yield of more than 3%. This is not an expensive, one-story stock like, say, Fevertree, which hit the headlines for the wrong reasons this week as its previously rapid sales growth faltered and its shares tumbled.

The challenge for investors is spotting opportunities like this in time to benefit. By the time the story is being written about in the FT (as the palladium price surge was this morning), much of the good news will already be in the price.

Margaret Thatcher famously used to read the ‘nibs’ (news in brief) column of the pink financial paper every day. That was probably because she was extremely busy and didn’t have time for the full-length stories. But the down-page story, which is not yet really news-worthy, can be a great source of what might be hitting the headlines in a few weeks or months.

Successful investors keep their nose to the ground, seeking out snippets of information that might give them an advantage. They also think laterally. It’s not the car makers that benefit from rising demand for catalytic converters (in fact their costs have soared on the back of the palladium price hike) - it’s the suppliers at one remove, like Anglo.

So, next time you place an Amazon order, don’t think about the extra couple of dollars on Jeff Bezos’s bank balance. Consider who made the cardboard box it came in, or who employs the courier that brought it to your door. Remember Mr Strauss.

Five year performance

(%) As at 22 Jan 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Anglo American Plc -79.2 468.8 43.0 5.0 27.9

Past performance is not a reliable indicator of future returns

Source: FE, as at 22.01.20, in local currency terms with income reinvested

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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