Kumba revival puts Anglo in a tight spot
Iron-ore surge complicates miner’s asset sale
RISING on the back of soaring iron ore prices, the share price of Kumba Iron Ore, one of the assets Anglo American wants to get rid of, has more than quadrupled this year.
In December last year, the iron ore price was at a dire $38 a ton, and parent company Anglo American needed an urgent fix for its balance sheet. So, that month, it decided to cut loose all its non-core assets, which consist of bulk commodities such as coal and base metals such as iron ore.
Almost a year later, it is Anglo’s bulk commodities and base metal assets that have outperformed the commodities sector, leaving core commodities platinum and diamonds, which are to remain in Anglo’s portfolio, struggling to pick up the pace. But copper was doing fairly well.
The iron ore price, which is currently at $78 a ton, earlier this month peaked at $79.60 while coal prices peaked at $307 a ton, a turnaround that analysts have said is surely behind the stalled sale of some of Anglo’s assets.
Norman Mbazima, deputy chairman of Anglo American South Africa, said on Thursday: “The more recent iron ore price strength has resulted in even stronger cash generation for iron ore miners.”
Mbazima reiterated that the decision on the future of Kumba would be based on value and OPTIONS OPEN: Anglo deputy chairman Norman Mbazima Anglo’s strict criteria, and that iron ore’s short-term price volatility had no “material impact” on Kumba’s future.
But he added that the price volatility “no doubt influences views on value, in particular where there is a market reference price for a listed entity such as Kumba”.
Since Anglo announced plans to sell the business, Kumba’s share price has rocketed 366%.
Wade Napier, an analyst at Avior Capital Markets, said a long-term iron ore price would determine what the sale price of Kumba would be, and whether or not an interested buyer agreed with the long-term iron ore price perceived by Anglo.
Napier said: “The short-term price is a short-term factor that will see Anglo want to hold on to it a little longer but I don’t think it’s going to change Anglo’s mind on selling the asset.”
Of the 17 analysts on Bloomberg who cover the stock, two rate Kumba as a buy, two have it as a hold and 13 recommend selling the stock.
Napier said this was because although Kumba was benefiting from rising prices, many still expected the price to decrease. Some were not confident that Kumba was in a “good place” operationally yet, especially after three years of disappointing results.
The Public Investment Corporation — the biggest shareholder in Anglo — has been vocal lately about Anglo’s asset sale, saying that it prefers to create a new company that includes all the South Africa assets for sale, including Kumba, coal and some platinum assets.
Hanré Rossouw, head of resources at Investec, said the question now was not about the sustainability of the business as the high iron ore price provided confidence that Kumba was indeed sustainable. SHOWING ITS METTLE: Piles of iron ore ready for export at Kumba’s mine in Sishen. The price of iron ore has shot up in the past year
He said that with the restructuring complete and the present price levels of iron ore, the company was doing “fabulously” this year in terms of its share price and making “strong margins”. Therefore, the question was whether it now made sense for Anglo to dispose of Kumba.
He said while some investors might be interested in a spin-off of Kumba as a standalone entity, others might not be attracted to a company with a single commodity, which could put pressure on its share price. But it all depended on how the asset was spun off.
South32, which was a spin-off from BHP Billiton in 2014 and listed in 2015, has gained 38% since. Rossouw said South32 had been a successful business because of the diversity of its portfolio and the size and scale of its assets, which provided a unique combination of commodities including manganese, silver, coal and nickel.
A spin-off of Kumba would not be a unique offering to an investor but would be similar to Exxaro or African Rainbow Minerals.
“There’s certainly value in running a more diversified portfolio, especially in the postsupercycle world. Cycles will be less correlated and therefore it makes sense to be more diversified than previously,” Rossouw said.
Anglo, which is not in a rush to sell its assets or make a decision on Kumba, said it was managing Kumba to improve the company’s operating and financial performance.
Mbazima said: “We continue to prepare Kumba in a manner to preserve our exit options and ultimately an exit must achieve our value expectations.”
Cycles will be less correlated and therefore it makes sense to be more diversified than previously
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