Article / 10 December 2015 at 1:12 GMT

Anglo American mines new depths

Managing Partner / Spotlight Group
United Kingdom
  • The world’s fifth-largest miner is set to shrink its operations
  • It is targeting the sale of over half of its assets and the loss of 85,000 jobs
  • There is more price pain to come in 2016

By Stephen Pope

This week, Anglo American, the world’s fifth-largest mining company measured by top line revenue, sent a seismic jolt through financial markets as it unveiled a strident and severe new strategy to sell assets sales and instigate job cuts numbering 85,000.

Anglo’s chief executive Mark Cutifani said: “… the severity of commodity price deterioration requires bolder action.”

Spotlight Indices
 
Source: Spotlight Indices © Spotlight Group

The chart above illustrates how over the past rolling 12-month period to Friday last week of the 11 industrial sectors followed at Spotlight Indices, it is “Basic Resources” that is the worst performing with a return of minus 49.65%.

In that time, the share price declines of some of the leading lights of the basic resources industry makes for a genuine horror show: Rio Tinto -34.5%, Vedanta -44.3%, BHP Billiton -46.0%, Glencore -72.2% and Anglo American -73.3%.


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 Little light at the end of the tunnel ... embattled Anglo American has four of its coal mines
up for sale. Photo: iStock

Cutting to the bone

The new strategy that has been made public includes scrapping dividends for H2 2015 and all of 2016, which has created a selloff in other mining shares on fears that where Anglo American has dared to tread, others will be inclined to follow.

Anglo American has among its prize assets the diamond giant De Beers plus several other metal and coal-based interests to reduce the asset portfolio by 60%. Three businesses will be created by the merger of six divisions. Anglo American has its Dawson, Foxleigh and Callide coal mines in central Queensland up for sale as well as its Dartbrook coal mine in the Hunter Valley in New South Wales.

Cost control

The company will take up to $4.7 billion in charges to shut or dispose of mines that are losing money as well as trim the workforce by 63% following the broad collapse in commodity prices this year.

Anglo’s shares have declined by 80% since summer 2014. This coincides with the time that the economic slowdown in China began to cause ripples in the global economy. The impact was particularly acute for the mining sector as China is the key consumer of all industrial commodities. It takes over 50% of global consumption of iron ore and copper.

Capex levels in the industry overall are still at the same level as seen in 2007 and so it is no surprise to learn that Anglo American will look to reduce its own capex by $1 billion on an annual basis. This is on top of the reduction of $2.6 billion already announced from the original guidance for 2015-2017. That means it will have cut the investment budget by 55% from 2014 levels.

The plan is to ensure the measures announced on Tuesday, December 8 will bring costs down by $3.7 billion between 2013 and 2017.

When all the miners could say was “MINE”!

During the great commodity super cycle, it appeared as if the boom in metals and gem prices would just keep going higher. After all, wasn't China driving global growth with an annual GDP in excess of 10% on a regular basis? India and Brazil were catching up as well. 

Looking back, it would appear that Anglo American is another example of a corporate over-extending during the boom years as it did not wish to be left behind its key rivals. It then found itself saddled with too much debt and too little money to service its obligations when the cycle swung south and boom became a bust.

Minas Rio, a Brazilian iron-ore mine blighted by soaring costs and collapsing prices is the signature deal of Anglo’s crisis as it is the $14 billion investment that became the symbol of the company’s acquisitive hubris.

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 Anglo’s decline in its share price coincides with the time the economic slowdown in China began to cause ripples in the global economy. Photo: iStock

No proven investment case

On November 30 I wrote a note that questioned if the mining companies represented value or were in fact value traps. Please see: Hard-hit iron ore erodes value of major miners.

I have to say that given the problems facing China and other emerging markets at the current time I do not believe the measures announced by Anglo American this week are sufficient to make it –even at a price of $319.70 – an attractive proposition. I think there is more pain in the commodity space during 2016 before one can believe the market has bottomed.

CEO Mark Cutifani said that all Anglo American’s assets: “… must deliver cash through the cycle … If not, they will not be in the portfolio. It’s as simple as that.”

That means that as he sets about taking an axe to the asset book he and the board have to make a multitude of hard-headed, correct decisions as to what specific elements of the basic resources will start to recover and what will still languish. To get that disposal programme precisely right is going to require a huge amount of good fortune.

But surely potential purchasers will be reading the same data of industrial and economic trends. That would imply that Anglo American is going to take a major hit as many assets will only be sold at knock-down prices on top of the decline to on book price that it has already endured.

The share price has only reacted to the macro news and the management statement. It has yet to be priced for the management of the process. After all, Anglo American may have an idea what it wants for an asset but it is actually only worth what someone will pay for it. Finance is a sense of perception and nothing more.

The plight of Anglo American is a reference point for much of the basic resources industry. When making our investment decisions with what may appear to be undervalued stocks, be certain to distinguish between what may be a dead cat bounce after a day or two of heavy selling and a trend reversal.

Anglo, nor its peer group are ready for a reversal of fortune yet. If one has a pang of pity for the mining companies, crush them. It is not a time to be squeamish as we need to deal in certainties and clarity.

In considering the basic resources sector, when sorrows come they come not as single spikes but as battalions.

– Edited by Gayle Bryant

Stephen Pope is managing partner at Spotlight Ideas.

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