Anglo refines down to core assets
Margins rise as miner focuses on leaner, healthier portfolio
● It was 2012 and Anglo American was half a decade into a multibillion-rand bet on iron ore in Brazil. In SA the platinum sector, in which it controlled the largest producer, was looking increasingly unstable.
Anglo was pushing deeper into the commodities that China’s growing economy was demanding, notably iron ore. Specifically the Minas Rio project in Brazil, which soon turned into a story of cost overruns and delays. And it did not help that the 2008 financial crisis and the global recession that followed pulled the rug out from under commodity prices.
The stage was set for a rejigging of the company. And that is what happened.
At this year’s AGM, chair Stuart Chambers said the company was radically different in shape, quality and performance. Also speaking at the AGM this week, Mark Cutifani, who took over in early 2013, called the company a fundamentally different business.
Cutifani, who ran AngloGold Ashanti before taking the reins at Anglo, had taken a long, hard look at the company’s global portfolio and jumped in with a pair of scissors.
“Since 2012, we have halved the number of assets, significantly upgrading the performance of each remaining asset, which has reinforced the sheer quality of the portfolio and our operating model impact,” he said.
Though some South African assets were also sold off, Anglo is quick to point out that it is still heavily invested in the country. And it is knuckling down with a further R70bn over the next five years. Anglo Platinum and Kumba Iron Ore are important parts of the group’s business.
Double productivity
And the company is very interested in getting the most out of what it has left.
“We are now delivering 30% more product from each retained asset, translating into 10% more physical product in aggregate across the portfolio at a 26% lower unit cost (in nominal terms), driving a doubling of productivity per employee,” Cutifani said.
And Anglo now has the look of a more global group. A third of its business is in South America these days. And despite paying out $2.6bn (R37.3bn) in dividends over the past two years and lowering debt by about $10bn, the shift has not been universally popular.
Vedanta chair Anil Agarwal, who holds a 19.3% stake in Anglo, has been vocal in his opposition to South American expansion, punting SA’s mining credentials on more than one occasion.
At the AGM Agarwal voted against the reelection as director of Marcelo Bastos, a South American mining veteran, but did not have enough support to have him removed.
But the numbers seem to suggest that the broad strategy — which also includes more copper mines in South America — is paying off.
“We have driven our mining margin up from 30% in 2012 to 42% today, and that’s with a lower price basket,” said Cutifani.
It would not be the first time Anglo did a big chop and change.
During SA’s years of economic isolation the group bought all sorts of assets. It became a conglomerate and controlled a string of divergent businesses. Since listing in London in the late 1990s, it has made a big effort to shed all its non-mining businesses. Despite this push, as recently as the middle of the last decade Anglo still had paper and packaging group Mondi in its stable, and sugar producer Tongaat Hulett.
So it shifted from conglomerate to global miner. And then from global miner to leaner global miner.
And Cutifani maintains that the company now has its pick of a number of attractive low-cost, high-return options it can exploit in its own business.
“So, unlike a number of our peers, we don’t need to go out and buy growth.”
There’ll always be a certain romance in the story of the more than 100year-old Anglo American, its founding family, and its relationship with the South African tale that’s still being written.
Along with Eskom, it has been arguably the most important company in the industrialisation of this country.
Today, while we all fret about the future of the younger, 1923-founded electricity firm, it wasn’t long ago that we were wondering whether Anglo would reach its centenary.
The Ernest Oppenheimer-founded mining company emerged battered and bruised after the last global recession, which saw commodity prices plummet from their record highs. While China’s insatiable appetite for raw materials would remain to offset the groggy growth plaguing certain geographies in the West, the good old days of the “super-commodity cycle” were over.
Since then, there have been many questions about Anglo’s future, especially as it is — more than any other global mining giant — largely exposed to the story of us.
This story includes calls from certain quarters of the governing party for the mines to be nationalised — inspired, no doubt, by those looking to bail out their peers, who had fallen into debt because of some horrendous empowerment dealings, and the higher electricity and wage costs that came with heightened tensions across the country’s platinum fields.
The likes of BHP Billiton, meanwhile, whose roots are in this country, long ago managed to untangle itself from South African risk, and its access to oil made it a better bet for investors.
But Anglo has always prided itself on being among the top three producers in all the minerals it mines. Because of this, it has always been a company whose rivals have been on the lookout for a potential play.
In mid-2009, Xstrata, which would subsequently be swallowed into Glencore, proposed a merger of equals with Anglo.
Xstrata, then led by Mick Davis, a former chief financial officer of Eskom, argued that companies of similar size and future earnings should combine to create efficiencies and benefit from the commodity diversification enjoyed by that benchmark of a miner, Billiton.
The proposal was rebuffed by Anglo’s board and, by the end of the year, had been withdrawn.
In his life outside Xstrata, some five years later, with a war chest of just under $5bn, there were rumours that Davis had made an offer to acquire some of Anglo’s Chilean copper mines, Brazilian nickel mines and some of its coal operations.
The timing for the bid — if there was one — was impeccable because, not too long after, Anglo’s Mark Cutifani announced that it was reducing its size from 45 assets to 16.
Markets loved the idea, but for romantics, such as myself, it was a sad tale.
Anglo, so central to the story of this country, with still much to do in our ongoing transformation journey, was set to become a shadow of its former self.
There weren’t many strong, blackowned, or, at least, black-controlled miners that could participate in the fire sale, so I just thought these assets would fall to the person or company with the fattest wallet.
Enter Indian billionaire Anil Agarwal, who proposed a merger between Anglo and his resources company, Vedanta, much in the same vein as Xstrata had done at the height of the global recession.
Rebuffed as well by the board, he has since gone on to become Anglo’s biggest shareholder.
This has led many to speculate that a full-on assault was imminent.
This would have definitely been the case but for two things: first, commodity prices picked up since Cutifani announced that 2016 strategy, and, second, he changed strategy after seeing the likes of Anglo American Platinum and Kumba Iron Ore benefit from the change in commodity markets.
Since Cutifani announced that all-too-depressing strategy in February 2016, Anglo’s shares have gained over 51%.
If there’s still a bid to come from Agarwal, it will be much more complicated — and costly — for the billionaire. There would be a premium demanded by shareholders. It seems to me that, much like Davis, he has missed his chance to seize the prize of South African mining. Cutifani, thanks to a rise in commodity prices, changing strategy and a bit of luck, may have just outsmarted this play for the miner. Anglo looks to live another day, but I am in no doubt there’ll be another play.
Or perhaps Agarwal has another card to play. I’m rather doubtful.
He has missed his chance to seize the prize of South African mining