Drastic steps for Anglo’s drastic times
Mark Cutifani is cutting Anglo American to the bone, but are the cuts deep enough?
ANGLO American boss Mark Cutifani will survive in the top job only if he gets the mining giant through the severe commodities rout, analysts say, after he announced he would cut about 60% of the company’s assets and workforce, and suspend its dividend.
Six years ago, the then CEO, USborn Cynthia Carroll, made a similar announcement, which resulted in the company’s share price dropping 17%; it essentially cost her the executive position. The market believed scrapping dividends was a harsh move.
Cutifani said scrapping the dividend was the “right call”, even though it would be difficult for shareholders. The company’s top two shareholders, the Public Investment Corporation and Coronation Fund Managers, said they supported the decision to suspend the dividend for the next 18 months. It cost the company R1-billion last year at a 10% yield.
Cutifani’s announcement, including the fire sale of more than 30 of the company’s assets, resulted in an almost 13% fall in the share price. Not because the market believed the steps were extreme, but due to doubts over whether Anglo would be able to execute the strategy in the current environment.
Peter Attard Montalto of Nomura said Cutifani’s cuts came in very different circumstances to those that prevailed when Carroll acted in 2009. “Under Cynthia the market still hung onto the idea of a strong China with high demand, and high commodity prices. That illusion has now gone and with it [there will be] structurally lower metals prices for the foreseeable future,” he said.
Investec Asset Management portfolio manager Hanré Rossouw said Anglo’s predicament could not be blamed on market conditions alone, and management also had to take responsibility.
“Why is the business where it is today, why did management not cut costs faster and why is the Anglo share price what it is today?” she asked. “One cannot afford to kick the can down the road — just look at where Lonmin finds itself at the moment following its strategy of ‘hope’ that prices will lift.”
Platinum miner Lonmin has seen its share price on the London Stock Exchange plunge more than 90% to just under £1 (R23) over the past year and has had to undertake three rights issues to save the company.
A London-based analyst, who wished to remain anonymous in line with company policy, said Cutifani may have left the big restructuring too late. “He is now in trouble and must go for broke . . . he is forced to take big steps.”
Difficult relations with labour and the government have complicated Anglo’s restructuring efforts. Unemployment in South Africa is at more than 25%, the worst rate of all the countries tracked by Bloomberg data. This makes any restructuring plans that include job cuts unpalatable for the ruling party and its unionist allies.
“Selling assets sounds good, but only if you can find buyers,” the London-based analyst said.
“In this market, with everybody knowing how hard up they are, it is very likely that they will get very little for these assets . . . the longer it does not get sold, the more under pressure they are to sell — a terrible situation for any seller to be under.
“He [Cutifani] has enough balance sheet flexibility, so the risk of an equity issue is not yet central to the picture, but if he fails to deliver anything near these promises, Anglo will be in dire straits,” the analyst said.
“In fact, even if he does all of this, given current commodity prices, I think his balance sheet will still be deteriorating, and there lies the real rub.”
Anglo chief financial officer René Médori said earlier in the week that Anglo’s credit rating could be downgraded to junk status. At current commodity spot prices the company did not meet the criteria for investment grade, he said. Anglo holds a BBB- credit rating from Standard & Poor’s and Baa 2 from Moody’s Investor Services.
Anglo has debt of $7.6-billion (about R115-billion) maturing over the next three years. The company’s net debt stands at around $13-billion and it has about $15-billion in financial liquidity.
“It will be expensive to try refinance debt at a below-investment grade,” said Rossouw.
She said Anglo might have to approach the market for additional funds before the end of next year if commodity prices did not pick up or if they fell even lower.
Anglo hopes the sale of assets will add $4-billion to its balance sheet, and the workforce will be cut from 135 000 to 50 000.
“Cutifani will survive if he can make Anglo survive,” one analyst said.
Even if he does all of this, given current commodity prices, his balance sheet will still be deteriorating, and there lies the rub