Anglo American curtails shrink to survive plan

February 21, 2017

by: Neil Hume, Commodities and Mining Editor

Anglo American on Tuesday called an end to forced asset sales after the mining company swung back to profit and reduced its debts last year because of an unexpected surge in commodity prices and cost cutting at its operations.

With a stronger financial position, Mark Cutifani, chief executive, said Anglo no longer needed to make disposals and could now hold assets previously deemed noncore, including iron ore and coal businesses in South Africa.

“We do not need to sell assets to address balance sheet issues,” said Mr Cutifani. “It’s done.”

As prices of raw materials tumbled a year ago, Anglo announced a dramatic restructuring that involved exiting six commodities to focus on mining just three — copper, diamonds and platinum. This in turn meant cutting the company’s mines to as few as 16, compared to 68 in 2013. 

But following a rebound in commodity prices last year that enabled Anglo to reduce its borrowings far quicker than anticipated, the company’s shrink to survive plan has been heavily curtailed. Mr Cutifani said Anglo would now have about 30 assets in its portfolio, some of which would involve mining iron ore, coal and nickel.

In spite of political and regulatory uncertainty in South Africa, Anglo’s historic home, he said the company was prepared to retain Kumba, an iron ore business, and thermal coal mines supplying overseas power stations.

“Given the costs we have stripped out of the business we are happy holders of these assets,” said Mr Cutifani.

The shift in strategy raises questions about Anglo’s direction. Analysts said the plan outlined one year ago by the company was premised as much on strategic as debt reduction grounds — notably by reducing its exposure to South Africa.

We do not need to sell assets to address balance sheet issues

In the year to December 31, Anglo reported a pre-tax profit of $2.6bn compared to a record loss of $5.5bn in 2015.

Underlying earnings before interest and tax rose 70 per cent to $3.7bn last year, in line with analysts’ expectations. Revenue was flat at $23bn.

The recovery in profit was driven by strong performances from businesses previously deemed non core — notably Anglo’s iron ore and coal businesses.

Net debt fell by about one-third to $8.5bn, significantly below Anglo’s $10bn target, helped by $2bn of asset sales and increased cash generation. The company is aiming to reduce net debt this year to $7bn.

“The deleveraging at Anglo continues with the net debt figure moving down to $8.5bn and this is likely to be the focus for investors,” said Tyler Broda, analyst at RBC Capital Markets.

As expected, Anglo did not recommend a dividend. It suspended payouts in 2015, but proposes to resume them early next year, when the company is looking to return 30 to 40 per cent of earnings to shareholders.

Rivals BHP Billiton and Rio Tinto pay out 50 per cent and 40 to 60 per cent of earnings respectively.

Anglo’s shares were down 0.8 per cent at £13.49 in Tuesday morning trading.

The stock surged almost 300 per cent last year and was the best performer in the FTSE 100. The shares have continued to rise this year, but trade at a discount to UK-listed peers, partly because of its South African exposure.

Rising costs and political uncertainty have made investors increasingly wary of companies with a large presence in South Africa.

But South Africa has the world’s biggest platinum reserves and significant holdings of coal, gold and iron ore, and Anglo currently generates about one-third of its underlying earnings in the country.

The mining industry is at loggerheads with the South African government over proposed changes to laws about black ownership of companies, and Mr Cutifani said that even though discussions with Pretoria had been “tough”, Anglo had been able to improve the performance of its assets in the country.

“Clearly we would like more certainty over policy frameworks and fiscal arrangements so we can continue to invest with confidence,” he added. “But for us we are committed to South Africa.”