A year is a long time in Anglo’s asset strategy
Mining giant does U-turn on sell-off plan
IT was only this time last year that Anglo American CEO Mark Cutifani announced that the company, hurting because of low metal prices, planned a dramatic asset sell-off that would leave it with just 16 mines.
In February last year, Cutifani gave a detailed plan of what the sale of Anglo’s “non-core” assets would entail. Those to be sold included iron ore, coal, manganese and nickel — everything except its diamond, copper and platinum operations.
But now, with commodity prices and the company’s share price surging, Anglo has signalled a U-turn, and Cutifani will keep more assets than originally planned.
He said in an interview this week that the UK-listed company was happy and comfortable with the assets it was retaining. These now included nickel, metallurgical coal and iron ore operations.
“We don’t use the term ‘core’ or ‘non-core’ [anymore] because it made people believe that they [assets] didn’t belong and that’s not really true, they actually do belong,” he said.
“So we’ve changed the words a little bit. So we feel very comfortable with them in the portfolio.”
He added that the company had exceeded its debt reduction target.
A year ago, Anglo was sitting at an uncomfortable debt level of about $13-billion (R170-billion). Through selling some assets and improving efficiency in its businesses it has cut this figure to $8.5-billion, well below the $10-billion target.
Cutifani said the company was hoping to lop another $1.5billion from the debt by the end of the year, but not through asset disposals.
“At less than $7-billion we leave ourselves in a position where, if commodity prices do take a turn for the worst, we don’t have too much debt, so that’s not a concern,” he said.
“The other thing is, if you took the low point of commodity prices in 2016 [June], and look at where we are today, we are actually generating cash at this level and that’s something we couldn’t say two years ago.”
The gains in Anglo’s share price — it is up 111.23% over the last year — may have created the impression that the group has addressed its most pressing issue, but some analysts believe that at $8.5-billion Anglo’s debt is still too high.
Among them is Ian Cruickshank, chief economist at the South African Institute of Race Relations, who said, at the time, Anglo had to reduce its debt further, particularly because interest rates were at a point in the cycle when they were likely to go higher.
“They still have too much debt, they still need to bring it down,” Cruickshank said.
“I’m not sure they should abandon all of those proposed sales that they were considering.”
Makwe Masilela, a portfolio manager at BP Bernstein, said a comfortable debt level for Anglo would be below $5-billion.
He said that if the asset disposal strategy was scrapped, it would take the company longer to pay down the debt.
“It [debt] is still an issue,” Masilela said. “The guy wants to pay dividends at the end of the year, the guy needs to continue to invest in the very same mines he owns to make them more efficient, the guy still has to have a cushion in case the commodity prices go up or down.”
Cutifani said Anglo, which suspended dividends in December 2015, was planning to resume paying them at the end of this year. Anglo would sustain its dividend through low debt levels, low costs, solid margins and adequate cash flow.
Cutifani said the current high iron ore and coal prices were not sustainable and would drop to moderate levels for the rest of the year.
Cruickshank said this was all the more reason that Anglo should be persevering with the asset sale; it would get much better prices while commodity prices were high than when they were low.
“They were absolutely adamant in establishing which commodities they wanted to get out of and the companies they do not want to get involved in,” Cruickshank said.
“It was basically a question of the commodity cycle and they certainly did not pick up things like the iron ore price and so on.
“Perhaps with prices having gone up, there may be fewer bargain hunters. Now is the time they should be thinking, what can we sell?”
Cutifani said Anglo would go ahead with plans to sell the three Eskom-tied coal mines — Kriel, New Vaal and New Denmark — as well as the New Largo project. He said potential buyers had been whittled down to six, and Anglo would ensure the buyer had localisation of at least 50%.
Cutifani said that after a few “small” sales this year, the company will be left with about 30 assets, instead of the 16 originally proposed.
But Masilela questioned the wisdom of setting “about 30” as a target; if Anglo did not meet the goal, the company would come under renewed scrutiny.
He said that as a diversified mining company, Anglo did not have “non-core” assets. Whatever it produced was a core asset, the only assets that would be “non-core” would be nonmining assets.
Masilela said that at one time conditions had allowed Anglo to have 68 assets.
“If conditions today dictate that they have 40, it’s fine,” he said. But if Cutifani now said he would stop the sell-off at 30, he would have more explaining to do if he was forced by unfavourable conditions to go down to 20.
“He should be saying: ‘Guys, we will do business in whatever way makes business sense then,’ ” Masilela said.
Cruickshank said there was nothing wrong with Cutifani changing his mind, “but they [Anglo] don’t seem to be quite sure of where they are going, how far they are going or how fast they are going to travel”.
He added: “It may not be a change of mind, it may be a delay in the process.
“They can’t develop every opportunity which comes their way . . . his job is to inform shareholders what the longterm view is and how they are moving towards those goals. I don’t want to see Anglo American close down this year and expand next year and close down again, that doesn’t make me a supportive shareholder, it’s not what I’m in Anglo American for.”
But Cruickshank acknowledged that spelling out the longterm strategy was easier said than done.
We don’t use the term ‘non-core’ . . . They actually do belong Now is the time they should be thinking, what can we sell?