Money: Is this the market's ace of diamonds?


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When trading starts tomorrow morning, Anglo American will be admitted to the official list of the London Stock Exchange. After a review, it should join the FT-SE 100 in about a month, joining the select pair of Billiton and Rio Tinto to take the number of mining companies in the index to three.

Many people will have some knowledge of Anglo American, generally associated with gold, diamond mines and South Africa. But it also has interests in this country - a scrap-paper recycling plant in Kent is part owned by the group. Other operations are Cleveland Potash in Yorkshire and Nash Rocks on the Welsh borders.

But the bulk of its income still comes from mining and South Africa. To make the transition from a South African quasi-investment trust to UK conglomerate it has had to undergo a transformation. Two sister companies, Minorco and Amic, have been absorbed into the parent and a separately quoted coal-mining company has already been taken over.

One consequence of this consolidation into one entity is that it now owns a number of shares in itself. At some point these will be placed in the market and will have a depressing effect, much as the placement of Billiton stock held by Sanlam did after it came to London two years ago. But this will also provide much-needed liquidity.

As diamond giant De Beers holds 42 per cent, Anglo American will be unusual for a FT-SE firm in that a large block of stock won't be available to the market. Anglo American in turn will also hold 30 per cent of De Beers, making the group bid-proof.

This involved structure will make life difficult for the index funds that have to buy the firms in the FT-SE 100 in the correct proportions. As Anglo American has a dual listing (in the UK and South Africa), managers will have to buy stock from South Africa to get enough. This demand will push the price of the shares up in the short term.

But this fair wind may turn rough in the months ahead. As the world's largest gold mining company, Anglo American will be hurt by the impending disposal by the Bank of England of 125 tonnes of gold this year. The gold price is already hovering around a low of $274 an ounce.

If you are looking at Anglo American as a potential Foolish investment, the only real handle you can get on it at this early stage is an analysis of its dividend payments. And even forecasting that pay-out is difficult as it won't show a consolidated cash-flow figure - we have to analyse its separate divisions.

Minorco accounts show an operating cash flow of pounds 365m. Assuming that business conditions are similar this year then this can be used as a base for 1999. We also need to add the dividend income from its De Beers stake - just under pounds 100m last year, making a total free cash flow of about pounds 465m. Take off money due for capital proj-ects, possibly about pounds 300m. That leaves about pounds 165m for dividends, a big increase on the pounds 90m Minorco paid out in 1998.

There may be more than our estimated cash flow as some new projects will be contributing. A dividend payment of about pounds 200m means 59p a share, a yield of 1.9 per cent - a little low when Rio Tinto and Billiton are yielding 3.3 per cent and 3.4 per cent respectively.

Maybe the market will accept that, but it'll need a good growth story to justify a low pay-out and a high share price. Index tracking funds will have to rush in, but Fools never buy hastily.

n Motley Fool,


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A UK supermarket chain last week announced it would make its own-label grocery range for village shops who'd otherwise buy Happy Shopper or use a cash-and-carry. Name the chain.

Answers to: UKColumn@ or snail mail to The Motley Fool UK, IoS Competition, 79 Baker Street, London W1M 1AJ.

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I have a (high income) unit trust PEP. Recently the fund managers wrote to say my PEP would be converted into accumulation units if I did nothing. Two paragraphs say how wonderful accumulation units are. There is no blurb on any downside. What are accumulation units, are they better than good old unit trusts, and is this conversion just another way of getting more commission out of us thick punters?

AC by e-mail

The Fool responds: In general, accumulation units of a unit trust are just those with income reinvested. Many trusts offer both income units, paying out dividends, and accumulation units which reinvest that income. Investors can usually choose.

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A couple of years ago I noticed directors buying at Sage, and bought at 669p. I was very happy, but cautiously sold half at 1,400p, the rest at 1,600p. This was profitable, but a mistake. Sage is now at 2,187p.

Last October I noticed Scoot. com when a director bought shares at 38p. I watched them go down, but then saw it had signed a deal with Freeserve. I missed the bottom at 17.5p, but bought at 20.5p and 32p. The price rose to 48p, but is now back to 38p. If I sell I may repeat my Sage mistake, but if I hold, internet-type stocks may fall as quickly as they rose!

PH, by e-mail

The Fool responds: That's a tough one. Your experience with Sage should not colour your judgement on You know the Foolish philosophy is to buy and hold - provided, of course, that you're happy with the company. In a fast-changing industry like internet commerce, the definition of a "long time" could be a little different to the normal convention.

n Send us your smartest or dumbest investment story. If we publish it, you'll get a free copy of the `Motley Fool UK Investment Guide'. E-mail to UKColumn or snail mail to Motley Fool, 79 Baker Street, London W1M 1AJ.

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