Finweek English Edition - - FRONT PAGE - BY DAVID MCKAY




You can see what for­mer An­glo Amer­i­can CEO Tony Tra­har i ntended when he in­stalled the South African com­pany in the sump­tu­ous dis­trict of Lon­don’s St James shortly af­ter its UK list­ing in 1999. Si­t­u­ated in a neigh­bour­hood de­signed by Re­gency ar­chi­tect John Nash, An­glo’s head of­fice at 20 Carl­ton Ter­race is a dec­la­ra­tion that the far-flung min­ing house could com­fort­ably stand its ground with the city’s blue bloods: Rio Tinto and BHP Bil­li­ton.

It didn’t seem to mat­ter that the likes of Rio Tinto would put i ts el­e­gant St James Square of­fices in May­fair up for sale or that BHP Bil­li­ton de­cided to take up premises a stone’s throw from the A202, con­ve­niently ad­ja­cent to the dis­count util­ity chain Ar­gos.

In bold con­trast, Carl­ton Ter­race has a view of St James’s Park, an ad­van­tage it shares with Buck­ing­ham Palace, while An­glo’s neigh­bours at Num­ber 18 made head­lines in 2013 when they sold the prop­erty for £250m, mak­ing it the coun­try’s most ex­pen­sive res­i­dence.

Of course, at the time of An­glo’s ar­rival i n the UK, the min­ing mar­ket was on the cusp of a breath­tak­ingly spec­tac­u­lar bull mar­ket driven by Chi­nese eco­nomic growth, a move­ment that econ­o­mists likened to the in­dus­trial re-awak­en­ing of Ger­many in the 1950s, only big­ger. It was a far cry from the strait­ened times of to­day.

For in­stance, BHP Bil­li­ton was able to take its place as a spon­sor of the Bei­jing Olympics in 2008, an event de­scribed as China’s com­ing-out party, while min­ers fell over them­selves sup­ply­ing mil­lions of China’s newly mon­eyed mid­dle class with fridges, hair dry­ers and wash­ing ma­chines and Bei­jing in­vested in the rail­ways, ports and roads through which its min­er­als for man­u­fac­ture were de­liv­ered.

Spon­sor­ing the Bei­jing Olympics was a stren­u­ous mar­ket­ing of am­bi­tion that’s quite un­think­able to­day as China’s eco­nomic growth slows, trans­form­ing the min­ing sec­tor’s su­per­nova into a black hole in less than three years.

It’s against this back­ground that Mark Cu­ti­fani, An­glo Amer­i­can CEO, was left to im­part a mes­sage all of his own. “We are look­ing for a res­i­dence that is more ap­pro­pri­ate and cost ef­fec­tive,” he said, an­nounc­ing a hefty down­siz­ing of An­glo’s Lon­don of­fices. “St James’s is a very ex­pen­sive place to stay for a min­ing com­pany.”


It ’s only a head of­fice move – the t ype that com­pa­nies do all the time – but it’s also a metaphor for an i ndus­try i n re­verse. Whereas Cu­ti­fani’s de­ci­sion to sell An­glo’s cor­po­rate jet two years ago could be in­ter­preted as show­man­ship, a dart at An­glo’s up­per-crust cul­ture by its newly ap­pointed Aus­tralian icon­o­clast, the of­fice re­lo­ca­tion seems tinged by sur­vival.

There’s also the shock­ing re­al­ity that An­glo will need less of­fice space af­ter it un­leashed a bru­tal $500m cost-cut­ting drive, of which $300m would be de­rived through the cut­ting of 6 000 jobs, equal to 46% of the or­gan­i­sa­tion’s to­tal sup­port head count.

All in all, the group’s in­terim re­sults last week came with both good and bad news. The in­terim div­i­dend was, sur­pris­ingly, main­tained, and net debt was cut sig­nif­i­cantly to $11.9bn, but there was also a $4bn write-down of An­glo’s coal and iron ore as­sets – a com­mon theme run­ning through the sec­tor that few com­pa­nies have been able to es­cape.

BHP Bil­li­ton an­nounced a $3bn write-down of its on­shore as­sets on 3 July – a move de­ter­mined by the con­tin­ued de­cline in me­tal prices in a year an­a­lysts thought would rep­re­sent the “bot­tom­ing-out” of the min­ing slump.

In­stead of the bot­tom­ing out, there’s been an ac­cel­er­a­tion in me­tal and share price liq­ui­da­tions. For An­glo, ev­ery min­eral or me­tal it pro­duced was lower in the first six months of this year, and some, such as nickel, were off by some mar­gin (20%), while met­al­lur­gi­cal coal and iron ore were both 14% lower; cop­per was 10% weaker, and plat­inum was 11% lower year-on-year.


Mar­ket con­di­tions like these are vir­tu­ally un­playable. An­a­lysts clearly point the fin­ger at China as it trans­forms from an in­vest­ment-led econ­omy to one driven by con­sumerism.

The mean­ing of this trans­for­ma­tion can be ex­plained by turn­ing the clock back to 2002 when China em­barked on a pro­gramme of cen­tralised in­vest­ment. Nor­mally, economies are built on higher GDP growth per capita, which leads to a larger tax take that, in turn, all ows gov­ern­ment t he spend­ing power on things such as in­fra­struc­ture, wa­ter provi s i on , sew­er­age an d road con­struc­tion.

In China, how­ever, this process was slightly dif­fer­ent in that it cen­tralised re­sources in Bei­jing, al­low­ing it to build out in­fra­struc­ture at a much faster rate and ear­lier in the GDP/capita cy­cle than other ma­jor economies.

The prob­lem for min­ing com­pa­nies – which threw them­selves into mas­sive ex­pan­sion to meet this eco­nomic growth – is that the re­sult­ing post-party hang­over can only be a brain atom­is­ing one. That’s be­cause China’s take of ma­jor min­ing com­modi­ties is be­tween 40% to 70% of the global to­tal, but its econ­omy is only 13% of the world’s GDP.

“The com­mod­ity in­ten­sity per capita in China has sur­passed many ad­vanced economies, and we be­lieve the out­look is for GDP to grow from con­sump­tion de­mand r ather t han i nvest­ment de­mand,” said Gold­man Sachs in a re­cent re­port. It forecast a nor­mal­i­sa­tion over time.

“Nor­mal­i­sa­tion”, how­ever, seems hard to come by presently.

Me­tal price weak­ness has given way to volatil­ity. Iron ore lost 25% in a week in mid-July, its sin­gle big­gest price swing ever. It re­gained some of the ground, but it was enough to jus­tify Kumba Iron Ore’s de­ci­sion to sus­pend its div­i­dend.

That was bad news for Exxaro Re­sources, pre­dom­i­nantly a coal pro­ducer but with a 19% stake in Kumba, that hand­ily yielded div­i­dend flow worth bil­lions of rand in pre­vi­ous years.

Now, how­ever, Exxaro has spo­ken of how this could mean fail­ing to pro­duce div­i­dends of i ts own, or worse: an in­abil­ity to meet its bank covenants. Its flag­ship em­pow­er­ment struc­ture, held in Main Street 333, has asked it for a R400m loan in or­der to re­fi­nance its own debt struc­ture. Thus one com­pany’s prob­lems cas­cade to another.


In an in­ter­view with Fin­week, Cu­ti­fani ex­pressed his sur­prise at the con­tin­ued weak­ness in the met­als mar­ket this year. “We didn’t ex­pect the rout to be this se­vere,” he said. “I think the con­cerns around China are rea­son­ably founded. Maybe this was over­due, but we prob­a­bly need another six months to work it out.

“It’s not a dis­as­ter,” he said, adding that, “We al­ways tend to over­re­act to some de­gree in the min­ing sec­tor.”

Per­haps Cu­ti­fani’s view is some­what coloured by the fact that, for oth­ers, the change i n China’s econ­omy i s not a catas­tro­phe so much as it is a nec­es­sary evo­lu­tion.

Over the l ong term, an econ­omy driven by con­sumer spend is a nat­u­rally ma­ture one.

And it ’s ac­tu­ally quite pos­i­tive for the likes of An­glo Amer­i­can sub­sidiaries An­glo Amer­i­can Plat­inum (Am­plats) and De Beers, it s 85% di amond pro­ducer, which rely on jew­ellery sales for a por­tion of rev­enue. Both have long iden­ti­fied the rise of the Chi­nese mid­dle class as an ex­cit­ing new mar­ket.

“Ul­ti­mately, a con­sumer-led econ­omy i s very good for j ewellery and for plat­inum,” said Chris Grif­fith, CEO of Am­plats. “That is a good out­come for plat­inum, but at the mo­ment what we’re see­ing is a very ner­vous econ­omy, cer­tainly for iron ore and steel,” he said.

“It’s dif­fi­cult to read too much into dayto-day de­vel­op­ments, but right now I’d say we’re in ner­vous ter­ri­tory.”

Bruce Cleaver, head of strat­egy at De Beers, said the group wasn’t “ter­ri­bly wor­ried” about the eco­nomic slow-down in China, but he nonethe­less ac­knowl­edged it was a fac­tor in the diamond mar­ket.

“China i s our s econd- big­gest mar­ket and an in­ter­est­ing one given its po­ten­tial growth and the im­pact that has on diamond jew­ellery,” he said in a tele­phonic in­ter­view. “There’s a tremen­dous num­ber of mid­dle- cl ass homes,

and peo­ple are still get­ting mar­ried, bear­ing in mind that the Chi­nese only buy diamond rings for mar­riages, not en­gage­ments.

“We also are see­ing more and more af­flu­ent Chi­nese peo­ple buy­ing diamond jew­ellery out­side their own coun­try in places such as Ja­pan and South Korea, pos­si­bly mo­ti­vated by the weaker cur­ren­cies there. So cer­tainly, big com­mod­ity busi­nesses are re­think­ing things, but for us, as the econ­omy in China ma­tures it moves more into a con­sumer phase,” he ex­plained.


Nonethe­less, in­vestors fol­low­ing the min­ing mar­kets have been through the wringer, this year es­pe­cially. Shares i n the JSE’s Re­source Top 1 0 have fallen 23% since May, rep­re­sent­ing big ca­su­al­ties such as Glen­core, down 18% in three months, 24% in a month, while BHP Bil­li­ton is 15% weaker, and An­glo is down 17%, also since May.

Ac­cord­ing to an­a­lysts, the cur­rent vul­ner­a­bil­i­ties of min­ing stocks come down to the fact that in at­tempt­ing to lower costs and raise pro­duc­tion – a means of re­duc­ing unit costs, i ncreas­ing mar­gins and ul­ti­mately im­prov­ing pay­outs to share­hold­ers – they per­pet­u­ate poor con­di­tions in the mar­ket.

“Are you man­ag­ing the mar­ket as you claim?” asked Allan Cooke, an an­a­lyst for JP Mor­gan, of Am­plats’s Grif­fith, who spoke of read­just­ing the com­pany’s sights and rais­ing pro­duc­tion at the group’s in­terim re­sults an­nounce­ment.

The group had, af­ter all, cut l abour num­bers to 8 700 from 32 000 at its Rusten­burg and Union sec­tion mine, but now pro­poses to in­crease out­put 80 000 ounces at the mines be­tween the 2015 and 2017 fi­nan­cial years. “Firstly, we’ve al­ready cut our pro­duc­tion, and se­condly we con­tinue to cut pro­duc­tion when we are pro­duc­ing un­prof­itable ounces,” Grif­fith re­sponded.

It’s down to the self-preser­va­tion tac­tics of min­ing firms that Gold­man Sachs re­sponded in a re­port in July that put the skids un­der the min­ing mar­ket. It said the early gains of cost cut­ting Rio Tinto, Glen­core and BHP Bil­li­ton un­der­took would have lim­ited ef­fect to­day.

“With the China su­per cy­cle fad­ing from 2011 on­wards, min­ers have shifted the fo­cus on the con­trol­lable with the fo­cus be­ing on in­creas­ing pro­duc­tiv­ity, re­duc­ing costs and cut­ting capex/ as­sets to com­bat fall­ing com­mod­ity prices,” the bank said.

“But we sus­pect most of the early ac­tions were taken ex­pect­ing the cy­cle to mean re­vert soon and prices to start trend­ing up again. These ac­tions have not been enough to stop declines in earn­ings and see min­ers con­tin­u­ing to un­der­per­form – be­ing the worstper­form­ing sec­tor in 2011 through to and in­clud­ing 2015 year-to-date,” it said.

Some­times the cost- cut­ting and restruc­tur­ing is just not vig­or­ous enough.

Lon­min l ost a quite stag­ger­ing 56% of its value in the last 30 days, notwith­stand­ing its de­ci­sion to ex­tend j ob cuts to 6 000 and close down 100 000 ounces of plat­inum group me­tal pro­duc­tion over the next two years.

Ac­cord­ing to RMB Mor­gan Stan­ley an­a­lyst Chris Ni­chol­son, Lon­min had bought it­self time, but the restruc­tur­ing was not “a sus­tain­able so­lu­tion”. He es­ti­mated the firm was burn­ing $175m a year at spot prices even af­ter clos­ing down pro­duc­tion.

“We es­ti­mate that prices 15% to 20% higher than spot are re­quired for Lon­min to achieve FCF [free cash flow] breakeven,” said Ni­chol­son, who added that this as­sumed capex of $130m even though Lon­min needed to spend up to $250m in or­der to sus­tain out­put in the medium term.

At spot com­mod­ity prices, and af­ter re­duc­ing capex to $ 120m, Lon­min was likely to be marginally cash-flow neg­a­tive through 2016, said An­drew Byrne, an an­a­lyst at Bar­clays Cap­i­tal. He added that the “big pic­ture” showed more trou­ble for Lon­min.

“[ T] hi s r educed s up­ply won’t im­pact me­tal mar­kets for around two years, and thus if larger peers Am­plats




and Im­pala Plat­inum were to em­ploy sim­i­lar strate­gies, the mar­ket is likely to re­main over­sup­plied over this pe­riod, ex­ac­er­bat­ing down­ward pric­ing pres­sure on com­mod­ity mar­kets and prof­itabil­ity,” said Byrne.


For con­di­tions to im­prove for min­ing com­pa­nies in the short term, there are a num­ber of sce­nar­ios that would have to pan out, each of them more and more im­prob­a­ble. One is that Chi­nese de­mand ac­tu­ally im­proves – which is un­likely in the short term.

The sec­ond and third fac­tors are that In­dia’s eco­nomic growth steps up and that there are sup­ply clo­sures – both equally un­likely given the fo­cus com­pa­nies are putting on unit costs rather than deep-vein surgery. The fourth hope is that the min­ing sec­tor sim­ply “bot­toms out” – and re­bounds – but an­a­lysts don’t think that’s a pos­si­bil­ity, at least not yet.

“It’s a blood­bath out there. Prices are so low, but that makes stocks look ex­pen­sive un­less prices re­cover,” said an in­dus­try source who didn’t want to be named, as his com­ments didn’t re­flect com­pany pol­icy.

“There are lots of con­cerns about debt and cash flow lev­els, but sup­ply cuts never seem to come. They cut costs, then they high grade [mine the as­sets for the best ore first] and then to the banks, but rarely is there [mine] clo­sure,” the source said. “We just have to wait for de­mand to eat into ex­cess sup­ply. That is the only way, but it takes time.”

It’s not all bad news. David But­ler, an an­a­lyst for Bar­clays Cap­i­tal, is con­vinced the news from China will im­prove in the sec­ond half of the year, ef­fec­tively from about now.

“We [...] con­tinue to be­lieve that Chi­nese eco­nomic data and com­mod­ity con­sump­tion will im­prove in the sec­ond half [. . .] ac­com­pa­nied by on­go­ing eco­nomic re­cov­ery in Europe,” he said, adding that over­all the cur­rent share price weak­ness was “an op­por­tu­nity”.

There is also the fact that even­tu­ally min­ing com­pa­nies will have to take the re­ally bit­ter medicine. Said Gold­man Sachs: “We be­lieve if 2015 plays out as we ex­pect, and min­ing stays near the bot­tom, it will likely set 2016 out to be the year of bolder moves.”

Among the “bolder moves” would be more ag­gres­sive port­fo­lio restruc­tur­ing, sim­i­lar to what is al­ready hap­pen­ing in the gold sec­tor, as well as cut­ting stick­ier and in­her­ently more dif­fi­cult cost ar­eas, it said.

Merger and ac­qui­si­tion ac­tiv­ity in the diver­si­fied min­ing sec­tor seems to be thin on the ground, largely be­cause it ap­pears as if the big play­ers still have de­cent ac­cess to cap­i­tal. But it is com­ing, an­a­lysts say.

“A pos­i­tive sig­nal to look out for is the de­ploy­ment of pri­vate eq­uity cap­i­tal that cur­rently re­mains sur­pris­ingly sub­dued,” said Hunter Hill­coat, an an­a­lyst for Investec Se­cu­ri­ties in Lon­don.

“We note t hat X2 has yet t o un­der­take a ma­jor trans­ac­tion,” he said. This is the com­pany founded by for­mer Xs­trata CEO Mick Davis, who said in 2014 that sup­ply cuts would nat­u­rally sow the seeds for a new lift in global de­mand for com­modi­ties.

I n the mean­time, i nvestors can ex­pect eq­ui­ties to r emain un­der pres­sure with the risk of fur­ther pain an om­ni­science. “If spot prices per­sist or worsen, we see on­go­ing div­i­dend com­mit­ments at risk, for the ma­jors in par­tic­u­lar,” said Hill­coat. “This may ne­ces­si­tate dif­fi­cult de­ci­sions such as mov­ing to close or divest as­sets.”

Said Gold­man Sachs: “Ul­ti­mately, we think the sec­tor bot­tom­ing out com­bined with some ca­pac­ity clo­sures i s the only way min­ers could again out­per­form peers – and we be­lieve we are far from that point still.”





Mark Cu­ti­fani

An­glo Amer­i­can CEO

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