Lonely times for An­glo

Should in­vestors call it quits on a 99-year icon?

Financial Mail - Investors Monthly - - Front Page -

The high-pro­file pres­ence of min­ing gi­ant An­glo Amer­i­can at this year’s Min­ing Ind­aba in Cape Town raised eye­brows, as many other cash-strapped min­ers opted to skirt an event that has be­come in­creas­ingly ex­pen­sive.

“It sent the wrong mes­sage,” an Ind­aba del­e­gate said. “It didn’t feel like a com­pany that is go­ing through dra­matic re­struc­tur­ing.”

Still, CEO Mark Cu­ti­fani ra­tio­nalised it like this: “SA ac­counts for 40% of our earn­ings and we have a com­mit­ment to the coun­try and to govern­ment, which is keen to see our pres­ence at Min­ing Ind­aba.”

This is es­pe­cially so, Cu­ti­fani said, given that the com­pany’s port­fo­lio still in­cludes An­glo Plat­inum, the coal divi­sion and Kumba Iron Ore. “We have halved our costs at Ind­aba year on year. We have taken 30% out of cor­po­rate over­head costs and there is more to be done. Our over­head ra­tios are among the low­est in the in­dus­try,” he says.

But if any­one was un­con­vinced about Cu­ti­fani’s de­sire to slash costs, they’d have been sur­prised by his Fe­bru­ary 16 an­nounce­ment of a much harsher cost-cut­ting and as­set sale pro­gramme than ever be­fore at the com­pany.

It was dra­matic news, spark­ing an ini­tial drop in the share price, be­fore a re­sound­ing 8% gain on the JSE the day af­ter­wards as in­vestors be­gan to com­pute the value likely to be un­locked by th­ese sales.

But it caps a mis­er­able time for the 99-year-old min­ing gi­ant, which, to many, has been syn­ony­mous with South African en­trepreneur­ship. Last year, An­glo had the un­en­vi­able dis­tinc­tion of be­ing the worst per­former on the Lon­don Stock Ex­change’s FTSE-100. And, from March, if its mar­ket cap falls too low, it will be dropped en­tirely when the in­dex is re­bal­anced.

Hanré Ros­souw, a port­fo­lio man­ager at In­vestec As­set Man­age­ment (IAM), says this would have “more of a psy­cho­log­i­cal ef­fect on share­hold­ers than a di­rect ef­fect on the share price. Sell­ing by in­dex tracker funds would have only a mi­nor ef­fect.”

Ros­souw de­scribes An­glo’s track record on merg­ers and ac­qui­si­tions as “dis­mal”, cit­ing the build­ing of Mi­nas-Rio, the un­bundling of Mondi (which has since grown to a larger mar­ket cap­i­tal­i­sa­tion than An­glo), the tim­ing of the pur­chase of the Op­pen­heimers’ stake in De Beers and the in­crease in its stakes in An­glo Plat­inum and Kumba.

“Con­sis­tently over the past 15 years, An­glo has mis­read cy­cles and pro­cras­ti­nated on tak­ing de­ci­sive ac­tion,” Ros­souw says.

Cu­ti­fani was brought in to steady the ship in 2013, but he sailed di­rectly into a storm.

“An­glo has in the past re­jected ap­proaches from preda­tors, pre­fer­ring to be de­fen­sive and

in­ter­nally fo­cused. It might be a sad way to cel­e­brate the cen­ten­nial an­niver­sary of this once proud com­pany in 2017, but if break­ing up An­glo would de­liver share­holder value, then it should be con­sid­ered.”

At a mar­ket cap­i­tal­i­sa­tion of R128.7bn just af­ter its year-end re­sults were re­leased, the value of An­glo Amer­i­can on the JSE was only slightly higher than that of Bid­vest, and one-sixth the value of me­dia gi­ant Naspers.

Cu­ti­fani’s bold new plan is an ef­fort to change this tra­jec­tory, go­ing back to ba­sics.

For in­vestors, it’s a straight equa­tion: the dif­fi­culty of de­liv­er­ing this as­set sale pro­gramme, seen against the value that can be squeezed out of the sales.

Among the as­sets that An­glo Amer­i­can is putting up for sale are well-man­aged busi­nesses which, in the past, de­liv­ered ex­cel­lent re­turns when the cy­cle was favourable.

They in­clude Kumba Iron Ore, as well as the Grosvenor and Mo­ran­bah met­al­lur­gi­cal coal mines in Aus­tralia and An­glo’s share of Cer­re­jon ther­mal coal in Colom­bia.

Other as­sets that are up for sale are nio­bium and phos­phate (in which Mick Davis’s X2 Re­sources could be in­ter­ested, it is spec­u­lated), fol­lowed by nickel and Aus­tralian ther­mal and met­al­lur­gi­cal coal mines.

Sell­ing Kumba may be the hard­est task. An­glo still holds 69.7%, and, based on Kumba’s share price of R65, An­glo’s stake is worth about R14bn. This is why An­glo says it is look­ing at “var­i­ous op­tions” for Kumba, in­clud­ing a spin-off.

To some, the Mi­nas-Rio pro­ject in Brazil has been the big­gest al­ba­tross around An­glo’s neck in re­cent times, suck­ing much-needed cap­i­tal away. But Cu­ti­fani says An­glo is com­mit­ted to com­plet­ing it. “We will then re­view our op­tions, de­pend­ing on the mar­ket and the progress we have made. We are not an­nounc­ing a sale to­day but are say­ing it is non­core.”

When it comes to sell­ing its South African coal mines, Cu­ti­fani says An­glo has run an open ten­der for those mines and held dis­cus­sions with govern­ment and Eskom, to which they are a ma­jor sup­plier.

An­glo has “plenty of room to ne­go­ti­ate value. If we can­not get the right value im­me­di­ately, we will take time to do so.”

The plan is to raise be­tween US$3bn and $4bn from dis­pos­als this year, which will al­low it to bring its net debt down to $10bn by the end of this year, from $12.9bn at the end of De­cem­ber.

In the medium term, An­glo wants to cut its net debt to about $6bn. By the end of this year, An­glo ex­pects to be free cash flow pos­i­tive.

Debt is one of the key rea­sons for An­glo’s weak share price.

An­a­lysts say this is why An­glo’s share price has shed 65% over the past three years, worse than most of its ri­vals, and the op­po­site tra­jec­tory of the JSE’s all share in­dex, which grew 21% in that time.

The plan will have a sharp im­pact on em­ploy­ment, though. Of its 128,000 em­ploy­ees, 68,000 jobs will be shed through dis­pos­als and an­other 10,000 through cost sav­ings and in­ter­nal ef­fi­cien­cies, bring­ing An­glo’s global work­force down to 50,000.

The re­form plan also en­tails cut­ting cap­i­tal ex­pen­di­ture, which fell to $4bn in the past year and is fore­cast to fall to $3bn this year and $2.5bn next year.

Once the slash­ing, sell­ing and re­form­ing are all done, there’ll be a new-look An­glo. And this much slim­mer ver­sion will re­tain its ex­po­sure to com­modi­ties and as­sets in which it has a lead­ing po­si­tion: cop­per, di­a­monds and plat­inum.

As it stands, An­glo Amer­i­can Plat­inum is the world’s big­gest plat­inum miner and it is keep­ing its most cost-com­pet­i­tive mines, which pro­duce com­modi­ties geared to­wards con­sumer spend­ing.

In di­a­monds, De Beers has a glob­ally unas­sail­able po­si­tion, with far bet­ter qual­ity pro­duc­tion than its near­est ri­val, Al­rosa of Rus­sia, and mar­ket­ing ex­per­tise built up over 100 years.

Though both di­a­monds and plat­inum have weak­ened of late, both should re­cover as con­sumer spend­ing on cars and jew­ellery picks up and China fo­cuses on a more con­sumer-driven econ­omy.

In cop­per, An­glo Amer­i­can owns two of the world’s big­gest mines, at Col­luhuasi and Los Bronces in South Amer­ica. Cop­per pro­duc­ers have found it

An­glo has room to ne­go­ti­ate value. If we can­not get the right value im­me­di­ately, we will take time to do so

very dif­fi­cult to de­liver on am­bi­tious ex­pan­sion plans and struc­tural deficits in cop­per are fore­cast for the medium term.

How­ever, cop­per will give An­glo Amer­i­can con­tin­u­ing ex­po­sure to in­fra­struc­ture de­vel­op­ment, which will re­sume when emerg­ing economies in Africa and Asia find sta­bil­ity.

Ros­souw says the fo­cus of the “new look” An­glo, on con­sumer com­modi­ties, makes strate­gic sense. IAM has for some time favoured com­pa­nies ex­posed to con­sumer spend­ing and avoided iron ore and coal pro­duc­ers.

And yet, there was noth­ing in An­glo’s lat­est an­nounce­ment to per­suade IAM to change its “un­der­weight” po­si­tion on the stock — partly be­cause An­glo is likely to face chal­lenges in ex­e­cut­ing its strat­egy.

This is no ex­ag­ger­a­tion. An­glo is em­bark­ing on one of the big­gest dis­posal pro­grammes this year, and its abil­ity to sell as­sets at a time when many oth­ers are sell­ing is lim­ited. Bil­li­ton and Glen­core have al­ready de­liv­ered on their as­set sales.

As­sum­ing all the sales hap­pen, how­ever, Shoaib Vayej, port­fo­lio man­ager at Afena Cap­i­tal, says An­glo’s fo­cus on just three com­modi­ties means it will no longer be a truly di­ver­si­fied re­sources group.

Vayej is in favour of a com­plete break-up of An­glo be­cause in­di­vid­ual as­sets would op­er­ate bet­ter with­out the costs and in­ter­ven­tions of the An­glo head of­fice.

It’s com­mon knowl­edge that An­glo has made some poor cap­i­tal al­lo­ca­tion de­ci­sions in re­cent years — es­pe­cially buy­ing as­sets at the top of the cy­cle.

The com­pany has then man­aged to squeeze some value out of the as­sets it sold, but this has al­ways taken longer than ex­pected — Tar­mac, for ex­am­ple. Had it acted sooner, it might have got bet­ter prices.

Though An­glo be­gan cut­ting costs be­fore some of its peers, the fact that it took so long means oth­ers are now do­ing the same. Vayej says this low­ers the cost curve across the in­dus­try, putting prices un­der fur­ther pres­sure.

Shortly be­fore its Fe­bru­ary an­nounce­ment, rat­ings agency Moody’s In­vestors Ser­vices cut An­glo’s credit rat­ing to junk sta­tus.

Moody’s says An­glo’s risks have in­creased largely be­cause of de­te­ri­o­rat­ing mar­ket con­di­tions. But it adds that An­glo’s goal of cut­ting debt will take longer and be more dif­fi­cult than pre­vi­ously ex­pected.

Moody’s doesn’t ex­pect An­glo to be able to re­duce its debt sig­nif­i­cantly within the next two years. Cu­ti­fani’s re­sponse is heated. “We have dropped 20 as­sets al­ready, far more than any­one else in the in­dus­try, and ahead of sched­ule. We ex­pect to dis­pose of an­other 10 by midyear. We look as if we will end our first phase pro­gramme six months early, de­liv­er­ing all we said we would,” he says.

He also points to the com­pany’s other achieve­ments since he took the CEO chair, just less than two years ago.

“In my first full two years in the role we have seen a 60% re­duc­tion in safety in­ci­dents, a 70% re­duc­tion in en­vi­ron­men­tal in­ci­dents and a 10% in­crease in pro­duc­tion across the group — de­spite clos­ing or sell­ing 30% of the as­sets.

“We have seen an in­crease in pro­duc­tion per per­son of 27% and a $1bn cut in cap­i­tal projects that were com­mit­ted be­fore my time and de­liv­ered on sched­ule,” he says.

Still, the big­gest in­flu­ence on An­glo’s shares is the min­ing cy­cle — and here, tim­ing is ev­ery­thing.

Con­sider this fact: in­vestors

who bought An­glo’s stock at R141 on the JSE in early 2009 would have more than dou­bled their money had they sold within two years.

How­ever, any in­vestors who bought the shares in mid-2000 at R84 and held for 16 years would have seen no cap­i­tal gain by mid-Fe­bru­ary this year, though they have ben­e­fited from a steady stream of div­i­dends.

Though Bil­li­ton and Rio Tinto also made poorly timed, costly ac­qui­si­tions, An­glo’s shares have been hit far harder than theirs.

Those who bought BHP Bil­li­ton shares in mid-2000, at R25 each, were still show­ing a six­fold gain to R150 (plus R13.51 on the un­bun­dled South32) in the same pe­riod. Like An­glo, BHP’s stock has fallen to less than half its 2014 peak.

Bil­li­ton share­hold­ers en­joyed con­tin­u­ous pro­gres­sive div­i­dends, how­ever, even if there is talk that Bil­li­ton will not be able to main­tain this div­i­dend pol­icy in the cur­rent en­vi­ron­ment.

Per­haps An­glo’s big­gest mis­take was its $14bn in­vest­ment in the Mi­nas-Rio iron ore mine, pipe­line and port pro­ject in Brazil. Mi­nas-Rio came on stream only in late 2014 — just as the iron ore boom was ta­per­ing off.

The oth­ers made blun­ders too: BHP Bil­li­ton’s $4.7bn pur­chase of shale gas as­sets in the US in 2011 was sim­i­larly poorly timed and Rio Tinto’s $38bn takeover of alu­minium pro­ducer Al­can in 2007 was even more costly.

Says Ros­souw: “An­glo’s shares un­der­per­formed BHP Bil­li­ton and Rio Tinto in the up­cy­cle not be­cause of neg­a­tive per­cep­tions to­wards its South African ex­po­sure but be­cause An­glo lacked iron ore ex­po­sure when iron ore prices were run­ning strongly.”

So is there still value left in An­glo? An­a­lysts think so. What is clear is that even af­ter An­glo shrinks to a cop­per, plat­inum and di­a­monds com­pany, it will still of­fer South Africans a rand hedge, with global reach, valu­able com­modi­ties and depth of ex­pe­ri­ence in min­ing.

JPMor­gan, which has an un­der­weight rec­om­men­da­tion on the shares, has said it sees value in An­glo over the long term, but this de­pends on a re­cov­ery in com­modi­ties prices in the medium term.

Though com­modi­ties prices firmed in the first two months of this year, an­a­lysts doubt there will be a ma­jor turn­around any­time soon.

Afena Cap­i­tal points out that last year, global GDP growth fell into a re­ces­sion, when mea­sured in dol­lars.

But Vayej says there is the po­ten­tial for “short-term re­lief for com­modi­ties, based on re­ver­sal of the 2015 trend and the fact that dol­lar strength has prob­a­bly peaked and the carry trade is re­vers­ing.”

Over the longer term, how­ever, there’s no get­ting around the fact that de­mand for com­modi­ties must im­prove for prices to re­ally shift into an­other gear.

“At­ten­tion has fo­cused on China, but its data re­mains neg­a­tive, and it is dif­fi­cult to trust the fig­ures.

“A broader re­cov­ery is needed from emerg­ing mar­kets, which are more re­source in­ten­sive, and as there are no signs of that yet, it con­tin­ues to put down­ward pres­sure on com­modi­ties prices,” he says.

Moody’s neg­a­tiv­ity ex­tends be­yond An­glo Amer­i­can.

It be­lieves “the cur­rent en­vi­ron­ment is not a nor­mal cycli­cal down­turn, but a fun­da­men­tal shift in the op­er­at­ing en­vi­ron­ment for the global min­ing sec­tor”.

As a re­sult, Moody’s is re­view­ing all its rat­ings in the min­ing in­dus­try.

“With the down­turn likely to be deeper and longer than pre­vi­ously an­tic­i­pated, the rat­ing agency be­lieves that price risk re­mains to the down­side, given global eco­nomic un­cer­tain­ties and slow­ing growth in China,” it says.

The good news for An­glo’s long-suf­fer­ing share­hold­ers is that Cu­ti­fani’s strat­egy is not based on an op­ti­mistic out­look for the prices of com­modi­ties.

The Aus­tralian min­ing vet­eran told the Min­ing Ind­aba that this year looked like the most chal­leng­ing yet and things “may still get worse”.

This is prob­a­bly why he won’t com­mit to any spe­cific date for the re­sump­tion of div­i­dends.

On this point, Cu­ti­fani says: “I would like to think we will have the debt un­der con­trol at the end of the year. We will need an­other year, in 2017, to get it right down to tar­get.

“The ear­li­est pos­si­ble date to re­sume div­i­dends would be 2018 but it is the board’s call.”

Still, in­vestors with the courage to buy “when there’s blood on the streets” may want to buy into An­glo Amer­i­can now.

The more risk-averse should wait for cer­tainty on an up­turn for com­modi­ties.

Three gen­er­a­tions … Nicky, Harry and Jonathan Op­pen­heimer in 1992.

Mark Cu­ti­fani … No div­i­dends be­fore 2018. Pic­ture: RUS­SELL ROBERTS

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.