Last week may have been Mark Cutifani’s first as the CEO of Anglo American, but it’s likely he was exercising his management judgment over the UK-listed group some weeks before.
The extension of the consultation period between Anglo American Platinum (Amplats), unions, and Government regarding restructuring of the platinum unit sounds like something Cutifani would sanction given his penchant for ‘conversations’ with stakeholders, especially the combustible SA Government.
And the 28 March withdrawal of Anglo Metallurgical Coal from Mozambique’s Revuboé coking coal project where it had last year announced investment plans worth $555m, prefigures comments he gave in an interview to a UK PR company – his first as Anglo CEO – in which he spoke about “… look[ing] at the portfolio, the commodities we’re in – do they make sense?” In that interview, he also spoke about a three- to four-month period in which he’d seek “to draw the pieces” of Anglo together.
Cutifani may have 36 years of industry experience, including in diversified mining at the Canadian firm Inco, but Anglo American and its pieces is his largest remit yet, especially since in the past six years he could focus on gold mining alone.
Since it was the work of PR, t he i nter v i e w t a kes a wideangle perspective of Cutifani ’s approach to Anglo. Yet there were some signal takeaways. He observed, for instance, that members of Anglo’s peer group were not as diversified as they once were, suggesting that Anglo’s competitive advantage is its exposure to late-cycle mining assets in Amplats and De Beers.
Unfortunately, Amplats is also the biggest drag on Anglo’s valuation given the labour and Government opposition to plans to restructure some 400 000 ounces a year of productive capacity from the subsidiary, possibly affecting 14 000 jobs.
“While the market has welcomed a new hand at the helm of Anglo, we believe that there are still significant uncertainties facing the company, which will take time to resolve; the major ones are right-sizing Amplats in the face of labour and political hostility, and bringing Minas Rio into production on time and within the higher revised capex budget,” said Des Kilalea, an analyst for RBC Capital Markets in a note dated 26 March.
Minas Rio is the Brazilian iron ore mine the purchase of which Cutifani’s predecessor, Cynthia Carroll, sanctioned. Unfortunately, her team ran over budget on the project, resulting in a $4bn write-down earlier this year. As Cutifani seems to suggest that Anglo’s competitors are not as diversified as they once were – largely owing to the preponderance of iron ore projects i n which Rio Tinto and BHP Billiton are progressing – there is the likelihood he will seek to recoup some of the investment by selling p a r t of R i o Minas’ second- phase expansion.
Anglo recently spent $5bn buying a further 40% in De Beers, taking its overall investment to 85%. Although the longterm fundamentals for the diamond industry are good, there are short-term concerns. Building the Jwaneng, Venetia and Gahcho Kue mines will pressure the group’s balance sheet while the relationship with another Southern African government – Botswana – will have to be navigated as the sales agreement with Debswana expires in 2021.
Standard & Poor’s credit rating agency last week downgraded Anglo to BBB from BBB+, citing negative discretionary cash outf low as capital expenditure and dividends to shareholders. Fortunately, the outlook remained stable because of the diversified nature of its asset base and liquidity.
It’s coincidental that on arriving at AngloGold Ashanti six years ago, Cutifani found himself faced with similar balance sheet pressure, a condition he solved by removing the hedge book and thus improving the cash generating ability of the company. Balance sheet issues explain the reticence to approve the $555m investment in Mozambique with perhaps other project suspensions or abandonments to follow. (Quite what Anglo plans with the New Largo coal project, so crucial for coal supply to Eskom’s Kusile power station is a matter for serious conjecture.)
Perhaps divestments may follow. Carroll presided over most of the non-core divestments at Anglo, a process her predecessor, Tony Trahar, initiated. Analysts expect Cutifani may seek to cut away Anglo’s nickel assets – Codemin and Barro Alto – which comprise only 3% or $1.3bn of Anglo’s net asset value, according to Kilalea.