ANGLO’S AUST RALIAN HAS REASON TO
Debt has it found itself in just two years ago. turnaround, escaping the doldrums This miner has managed an impressive
at one point during Anglo American’s interim results presentation last month, a question posed by the audience called for interaction between three of the group’s executives: Mark Cutifani, the CEO, Tony O’Neill, the firm’s technical director, and the newly appointed chief financial officer (CFO), Stephen Pearce.
It would be wrong to suggest one was suddenly transported to a bar in Melbourne – although all three are Australian, there wasn’t a “G’day mate” to be heard – more, rather, the sense that Cutifani has transformed Anglo American. It couldn’t have been further from the Anglo of Tony Trahar or Julian Ogilvie-Thompson who once headed the group in the 1990s.
And spirits were high; camaraderie in abundance, and a far cry from the atmosphere less than two years ago when Cutifani, then sporting a giant rose in his lapel in the hope analysts would be distracted enough not to notice the turmoil in which the group had been flung by perilously low commodity prices.
Cutifani’s response was to cut back assets and projects in an effort to control the balance sheet. Nearly 30 separate assets were hived off, including the company’s coal, phosphate and aggregates business. Jobs went with them but jobs were also cut. Anglo’s head office in Johannesburg turned eerily quiet and there’s still lingering talk Anglo might leave the city for cheaper digs.
But this year’s interim results presentation was like a stroll along a palm-lined road into the Eternal City for Cutifani. Assisted by the completely unforeseen recovery in commodity prices dating from about January 2016, net debt was reduced to $6.2bn – its lowest level in five years and well below the $7bn yearend target that Cutifani had originally set the group.
More impressively, Anglo announced the resumption of dividends, starting with the interim – perhaps surprising at least half of the analyst community who hadn’t anticipated it – and a new payout policy of 40% of earnings. Almost immediately analysts dived for their calculators and spreadsheets.
“Under Anglo’s new 40% dividend policy, at current commodity prices, we estimate a payout of approximately $1.2bn to $1.4bn in 2017-18, equivalent to a dividend yield of 6% to 6.7%,” said JP Morgan Cazenove in a note to clients. It added that Anglo would continue to deleverage its balance sheet while continuing to pay out attractive dividends, and recommended buying the share as the company was undervalued.
Prices to cool down?
That was on 28 July. Shares in the group have since been steadily on the march, gaining a further 4.7% at the time of writing. “Anglo is up about 14% over the past week, roughly double the peer group average reflecting the partial rerating we anticipated through the dividend reinstatement,” said Macquarie in a report dated 1 August. But it warned of possible share price weakness to come.
The expectation is that iron ore and coal prices – the bulk commodities Cutifani said in the teeth of his restructuring he wanted to divest from – will start to cool. Ironically, these were the minerals that propelled Anglo to its strong financial performance in the six months ended June. Yet Macquarie found reasons to be optimistic.
“Over the next few months we believe the stock is likely to experience weakness as iron ore and met [metallurgical] coal prices cool,” it said. “This will likely offer more attractive entry points, in our view,” it added. In short, the bank – another Australian – likes the Anglo investment case.
The question is, however, where it will go from here. Perhaps expressing the extreme fickle nature of the market, one analyst at Anglo’s interim presentation asked whether the group’s new caution in terms of its balance sheet management would come back to bite it