Hard work leads to turnaround

Anglo American and its peers are pumping cash again and shareholders are basking in good returns

If commodity prices continue their current strength, Anglo American will soon have a problem that mining executives love and shareholders have learnt to feel some apprehension about — too much cash.

It is not alone. SP Angel analyst John Meyer says the top four London-listed miners (BHP Billiton, Rio Tinto, Anglo American and Glencore) have together generated Us$26.7bn in free cash flow in their most recent period.

In the mining boom of 2001-2008, surplus cash and pressure to demonstrate growth options spurred large mining companies to splurge on unwise acquisitions and costly projects. Anglo was no exception. It was criticised for the Minas-rio greenfields iron ore project in Brazil, which is still not at full production and will take a long time to repay the $14bn of capital invested (including $5.5bn to buy it).

At its lowest point, in 2008, the group had to suspend dividend payments, to the fury of longstanding shareholders.

Anglo’s priorities, says

CEO Mark Cutifani, are to pay down debt and declare dividends. The group almost halved net debt to $4.5bn in the year to December compared with 2016 and declared a dividend of $1.02/share, its highest in a decade.

Return on capital employed (ROCE) rose to

19% from 11%, well above the 15% target set in 2013.

If commodity prices continue to be strong, finance director Stephen

Pearce expects this year will deliver “more of the same”.

After those two objectives are met, only “sensible” growth options will be considered and most of these are internal, organic projects with quick capital paybacks, Cutifani says.

Anglo is finalising the feasibility study for the $5.5bn Quellaveco copper project in Peru, in which Mitsubishi holds 18%. The Financial

Times reported in January that Mitsubishi was considering exercising its option to increase its stake to 30%. Cutifani says Anglo will talk to possible partners this year to syndicate the project, if it offers value.

He says Anglo has learnt from Minas-rio. One lesson was that it would have been easier if it did not own 100% of the project. But Anglo is not actively seeking to sell a stake now.

Minas-rio produced 16.8 Mt of iron ore last year and output is expected to be similar this year. It has just received the licence enabling the third phase of expansion which will bring mine output up to capacity of 26.5 Mt/year by about 2019/2020. Cutifani says the amount of capital required to achieve this will be relatively small as the big-ticket items have already been completed.

Other potential growth projects for the next 12-18 months are the $200m de-bottlenecking of the Moranbah/grosvenor metallurgical coal complex in Australia and a $200m investment in buying a vessel for De Beers Marine Namibia to deliver another

Australia