Anglo American's Dividend Dilemma: When Cash Flow Meets Sector Headwinds

The mining giant Anglo American (NGLOY) has long been a bastion of dividend reliability, fueled by its vast resource portfolio and disciplined financial strategy. Yet as 2025 unfolds, cracks are emerging in its ability to sustain payouts at current levels. A confluence of eroding free cash flow (FCF) and sector-wide vulnerabilities—from volatile commodity prices to escalating ESG costs—threaten to force a dividend cut. For investors, the writing is on the wall.

The Free Cash Flow Tightrope

Anglo American's FCF, the lifeblood of dividend sustainability, has followed a precarious path. In 2023, underlying FCF dipped to $0.1 billion, a sharp drop from $1.385 billion in 2022, as falling commodity prices and operational headwinds bit. A rebound in 2024 to $1.7 billion was driven by $5.3 billion in asset sales (steelmaking coal and nickel businesses) and $1.3 billion in annualized cost savings. But this recovery masks deeper fragility.

Crucially, the 3-year FCF growth rate has slumped by 37%, lagging 88% of its Metals & Mining peers. Even with 2024's temporary boost, FCF per share (€1.10 TTM) remains below pre-2022 levels. The problem? Structural challenges. Anglo's reliance on volatile commodities like copper and diamonds leaves it exposed to price swings. For instance, rough diamond prices fell sharply in 2024, prompting a $2.9 billion impairment at its De Beers division—a hit to profits but not yet FCF. Yet as these impairments mount, they erode the buffer for future payouts.

Sector Headwinds: A Perfect Storm

The mining sector faces systemic risks amplifying Anglo's cash flow pressures:

1. Commodity Price Volatility: Despite a cyclical rebound in copper demand, prices remain 10% below 2023 levels. For Anglo, which derives 73% of EBITDA from copper and iron ore, this dampens FCF.
2. ESG Costs: Transitioning to net-zero operations requires capital. Anglo has allocated $1.8 billion by 2025 to cut emissions, diverting funds from dividends.
3. Regulatory Risks: New mining taxes in countries like South Africa (a key jurisdiction) could squeeze margins further.
4. Overcapacity: Glutted markets for nickel and thermal coal—divested businesses—highlight oversupply risks, limiting pricing power for retained assets.

The Payout Ratio Warning

Anglo's dividend policy targets a 40% payout ratio, but recent trends exceed this. In 2024, the ratio hit 47%, and analysts project it to rise to 51% in 2025. This climb is unsustainable without FCF growth. Even with planned cost savings (totaling $1.8 billion by 2025), the dividend's safety hinges on two shaky assumptions: - Commodity prices stabilize or rise. - Impairments don't worsen.

Should either fail, Anglo's net debt—already at $10.6 billion (1.3x EBITDA)—could climb, forcing a payout cut to preserve financial flexibility.

Investment Implications: Time to Hedge the Bet

For investors in Anglo's shares, the dividend is a critical pillar of total return. With FCF growth stalling and sector risks compounding, the odds of a dividend reduction by mid-2025 are high. Here's how to navigate:

1. Reduce Exposure: Trim holdings in NGLOY, especially if dividends are a priority. The stock's 4.58% dividend yield (projected for .2025) may look enticing, but a cut would erase this advantage.
2. Focus on Cash Flow Drivers: Monitor FCF trends and commodity prices. A copper price below $3.00/lb or a further diamond market slump would trigger red flags.
3. Consider Short Positions: For sophisticated investors, shorting Anglo or its peers could capitalize on sector-wide underperformance.

Conclusion: The Dividend Cut is Inevitable—Plan for It

Anglo American's dividend has been a hallmark of its financial discipline. But in 2025, the math is catching up. With FCF growth stagnant, payout ratios climbing, and the mining sector facing a perfect storm of risks, a dividend reduction is not just possible—it's probable. Investors should brace for this outcome and adjust portfolios accordingly. In mining, as in nature, survival often depends on adapting to harsh conditions. For Anglo, that may mean reining in its dividend largesse.