Anglo slumps to 15-year low as bank casts doubt on cash flow

ANGLO American shareholders counted more losses after yet another difficult week for the global mining titan.

The share price dipped below R90 for the first time in 15 years after UK-based bank HSBC this week downgraded its rating on the miner, calling into question the viability of its cash flow.

Anglo now commands a market value of about R122.7-billion, which is a far cry from the R300billion in early January when the share price traded at R213. It is now trailing behind companies such as paper and pulp group Mondi in the JSE’s top 40 rankings.

In a research report, the bank suggested that Anglo’s current restructuring drive did not go far enough to address the weaker commodity cycle.

Under the guidance of CEO Mark Cutifani, the JSE- and London-listed miner reshaped its portfolio, which is made up of a range of commodities including copper, iron ore and platinum.

Anglo is likely to pocket at least $3-billion (about R43-billon) from asset sales in addition to cutting jobs and capital expenditure to cut costs as it seeks to ride out the weak market conditions.

Topping the list of investors’ concerns in the current downward cycle is Anglo’s dividend, which HSBC said may be suspended in the foreseeable future.

HSBC said that before further capex cuts, Anglo would likely lose at least $2.7-billion in 2016 on current commodity prices to maintain the dividend. Anglo paid out dividends in the six months to June this year despite incurring a net loss of $3-billion.

“Management can do everything in their power to improve efficiencies and in turn earnings, but at the end of the day they are all price takers,” said Andrew Dittberner, chief investment officer at Cannon Asset Managers.

But some analysts said Anglo would emerge in a much better shape when the commodity cycle turned for the better.

“Anglo is unfortunately riding the downside of the commodity super-cycle. Cutifani is doing great work, but it is really hard to do anything about the pricing,” said Rob Spanjaard, a director at Rezco Asset Management.

Metal prices are showing little signs of a meaningful recovery at this point. Copper, which is often regarded as the lead indicator of the world’s economic health because of its extensive industrial use, is stuck at multi-year lows at just below $5 000 a ton. It peaked at $9 600 a ton in 2010.

The recent slump in industrial commodity prices can largely be attributed to ample supply built up during the previous boom colliding with a sharp slowdown in demand, according to Capital Economics’ head of commodities research Julian Jessop.

Commodity markets have yet to respond to a series of stimulus measures by top consumer China, whose economy is forecast to grow at the slowest pace in 25 years this year. It has cut interest rates and lowered the amount of money that banks need to set aside as reserves in an attempt to boost economic activity.

Spanjaard said commodity prices still had some work to do and may be weak for a while, possibly another year or two.

For shareholders in the Anglo stable and the resource sector in general, 2015 has proved challenging. Anglo subsidiary Kumba has lost more than two-thirds of its market value, underscoring the destructive toll of depressed metal prices. It is now hovering around R50.

The JSE resources index is down more than 50% from its highs reached in July last year.

Anglo is riding the downside of the commodity super-cycle