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, www.fool.co.uk

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