Anglo American reaps restructuring benefits

Posts its highest dividend in a decade Operating profit grows to $5.5bn from $1.7bn in 2016

Anglo American has changed almost beyond recognition since a restructuring and sales programme was started in 2013 to address enormous debt, with the company on Thursday posting its highest dividend in a decade and slashing debt.

Anglo CEO Mark Cutifani made the point several times during the diversified miner’s annual results presentation that the company was a “fundamentally different business” and that there was still more to do despite the stellar performance for 2017.

Anglo has cut the number of its mines to 37 from 68, with those in SA falling to 17 from 31.

Cutifani said that despite the reduction, Anglo was generating 9% more product, with productivity per worker improving 80% since 2012.

Anglo doubled attributable profit to $3.2bn for the year to end-December 2017 and operating profit grew to $5.5bn from $1.7bn in 2016. It posted a fullyear dividend of $1.02 per share. Net debt halved to $4.5bn, a full $1bn lower than consensus market expectations.

The dividend, while the highest in a decade according to Cutifani, was shy of the $1.05/share consensus market forecast. “We believe the stronger cash conversion and lower net debt are more important than the slightly lower than consensus dividend,” said Goldman Sachs.

The expectation was that — with higher commodity prices so far in 2018 and hopes for the cycle to continue — Anglo would make further large inroads into its debt, which at one stage was $13bn of net debt.

SA remains the single largest source of earnings for Anglo, generating half the group’s free cash flow from platinum, diamonds, iron ore, manganese and thermal coal, but analysts were still wary of the country as a mining jurisdiction.

In an interview, Cutifani said he had a long history with President Cyril Ramaphosa and took him “at face value” when he spoke of the need for a stable and investor-friendly regulatory environment.

Cutifani said evidence that the mining environment in SA could change was bolstered by

Ramaphosa just days after being elected head of state, when he personally intervened to get the Chamber of Mines to postpone a court case to review and set aside a third and damaging version of the Mining Charter in favour of negotiations.

“We are very focused on working across the portfolio and with the government and other stakeholders to make sure our South African business remains competitive and continues to improve,” he said.

“When it can be demonstrated we can make returns in the country then investment follows. It’s a very simple thesis and one that drives our behaviour across the global portfolio,” he said.

The outcome of talks around the new Mining Charter would determine Anglo’s approach to its businesses in SA, he said.

“We are committed to the assets we have in SA. We will always assess if there’s a change in policy.

“The Mining Charter, however it frames up, will impact our capital allocation decisions … we are encouraged by what the president says … that there has to be policy certainty and an environment in which we can make returns.”

Anglo has finished its large disposals and has taken the balance of its South African assets off the table after selling its thermal coal mines that supplied Eskom.

While the remaining assets in SA were making money, there were still pockets of work that remained to be done to realise the portfolio’s full potential, Cutifani said.

One analyst suggested the strength of the rand could cost Anglo $750m this year.

Looking ahead, Anglo could trigger its first major new project in 2018, but analysts were wary of the company’s track performance, given the massive overruns and delays at the ill-conceived Minas Rio iron-ore mine in Brazil, which has cost more than $13bn to buy and build.

Cutifani dismissed Minas Rio as a poorly thought out, engineered and executed project, and said Anglo had taken hard lessons from the experience that it was applying to the undeveloped Quellaveco copper project in Peru.

Anglo is likely to bring in one or more partners to share the risk and capital, which some analysts have estimated at $5bn to $6bn.

The board will decide on the project in the second half of 2018.