Anglo needs a good look at big De Beers hole

ATHE MINING GIANT HAS BEEN RELUCTANT TO PART WITH ITS LESS PROFITABLE OPERATIONS

nglo American is in a hole and it needs to stop digging. The mining giant, which reported a 41% drop in annual profit on Thursday, has launched a sweeping review of its portfolio and may sell or spin off some of its assets. But its problems run deeper than a few underperforming businesses. It needs to overhaul its capital allocation to regain investor confidence and compete with its more disciplined rivals.

The miner, which has a market value of $36bn, has been hit hard by the slump in prices and demand for platinum group metals (PGMs) and diamonds — two of its core commodities. It wrote down the value of its De Beers diamond unit by $1.6bn, reflecting the impact of a weak global economy on the luxury market. Its PGM division, which includes the troubled SA platinum mines operated by Anglo American Platinum (Amplats), saw its revenue and its core profit, or earnings before interest, tax, depreciation and amortisation (ebitda) plunge.

Anglo is not alone in facing these headwinds. But it has been slower than its peers to adapt. Rival BHP Group has been streamlining its portfolio for years, focusing on high-quality iron ore, copper and other assets. Rio Tinto has also been shedding noncore businesses and returning cash to shareholders. The mining duo has benefited from strong demand and prices of iron and copper, driven by China’s economic recovery and the global shift to green energy. Anglo has exposure to these commodities too, but they account for much less to its top line compared with BHP and Rio.

Anglo has been reluctant to part with its less profitable operations. The company, the history and fortunes of which are intertwined with SA, has resisted pressures from some investors to spin off or sell some of its assets, including some of its platinum assets — whose future in the eco-friendly world is in doubt as Amplats’ biggest clients shift to electric-powered vehicles.

Admittedly, Anglo has also invested heavily in expanding its copper production in Peru and Brazil — an allocation of capital that makes sense given the global energy shift. And it has pursued a costly takeover of Sirius Minerals, which is the largest mining project in Britain and has deep deposits of polyhalite, a mineral that can be used in fertilisers. The logic of the project rests on the idea that the mineral can support the transition to a low-carbon economy by enhancing crop yields and soil quality.

But these are long-term bets that will not be paying off for years. In the meantime, Anglo is saddled with legacy assets that may not be fit for purpose in a world where environmental, social and governance criteria are increasingly important for investors and customers.

Duncan Wanblad, who took over as CEO from Mark Cutifani in 2022, has some tough choices to make to restore Anglo’s fortunes. The most obvious candidate for disposal or a spin-off is De Beers, the world’s largest diamond producer by value. The division has been hit hard by weak demand for the luxury product. The outlook is bleak as some consumers shift to lab-grown diamonds, which are cheaper and more ethical than mined ones. De Beers has a presence in this market but it is too small to make a difference. Anglo should cut its losses and sell or spin off De Beers while it still can.

Another area where Anglo needs to act is SA, where it has a large exposure to PGMs, mainly through Amplats. The future of platinum in a low-carbon global economy is in serious doubt, enough to prompt one of the country’s largest money managers, Coronation, to dump everything from Impala Platinum to Amplats. Coronation head of SA equity research Nicholas Hops says the PGM sector is a value trap and that companies should decommission unprofitable mines.

Hops has a bearish view of the PGM markets, as he expects surpluses and lower demand in the long term. He cites the shift to electric vehicles, which do not require PGMs, and the potential substitution of cheaper metals, such as ruthenium, for platinum. He also warns of the environmental and social risks of mining PGMs, which are often found in deep, narrow and dangerous shafts. Wanblad may want to consider spinning off Amplats.

By selling or spinning off its underperforming and problematic businesses, Anglo can unlock value for shareholders and focus on what is likely to be relevant in the environmentally friendly world: fertiliser, copper and iron ore. The time for tinkering is over. Anglo needs a radical overhaul.