When Mark Cutifani launched Anglo American into the largest divestment programme in its 99-year-history, investors were deserting the heavily indebted mining company in droves as commodity prices plummeted.
The Australian chief executive responded to the slump with a plan for a radically reshaped company that would retreat from its diverse heritage and focus on just three commodities with supposedly brighter prospects: diamonds, platinum and copper. Mr Cutifani pledged at least $3bn in asset sales this year to cut group net debt below $10bn — a figure that at the time way exceeded its market capitalisation.
That was February. Seven months on, and Mr Cutifani is only half way towards his minimum asset sale target.
But rather than chastise Anglo for lack of progress, some analysts are now raising questions about the wisdom of the FTSE 100 company’s shrink-to-survive plan because there has been a surprising rebound in commodity prices in recent months. Several of Anglo’s best-performing businesses — such as coal and iron ore — are among those that have been put up for sale.
“When Anglo announced the [restructuring] plan it felt like [the company] could be a matter of weeks away from being forced into very punitive [asset] sales or having to raise equity,” says Fraser Jamieson, analyst at JPMorgan. “Now the balance sheet is looking much less stressed and risks have fallen very significantly. They find themselves with a different problem — they have publicly committed to this restructuring programme but the pressure to do it from a balance-sheet perspective is not there any more.”
Anglo’s shares have jumped more than 300 per cent since January, but Mr Cutifani is sticking to his reconfiguration plan, which involves exiting six commodities.
He suggests commodity price rises are unlikely to endure. “You cannot say that two good months in coal is a new world,” he says in an interview with the Financial Times. “That is the mistake we make in this industry. You get a little bit of joy and you think that the world has changed. We are not going to allow one or two good months change what we think is strategic.”
The best-performing commodity this year has been coking coal, used in steelmaking. Anglo wants to sell two large coking coal mines in Australia, but the spot price for the premium version of this commodity has leapt more than 150 per cent this year.
“We think [Anglo] are producing coking coal at a cost of around $85 per tonne, so at a spot price of $200/t they would be mad in one way to sell coking coal mines at the moment unless someone is offering a hugely attractive price — which we doubt,” says David Butler, analyst at Barclays.
Anglo’s largest deal this year has been to sell a niobium and phosphate operation in Brazil for $1.5bn, moving the company halfway towards its target of between $3bn and $4bn of disposals in 2016.
One country where it will be tricky for Anglo for execute disposals is South Africa, its historic home and the location of the biggest swath of assets that the company wants to sell, including coal, manganese and iron ore businesses.
Political turmoil stemming from a power struggle within the ruling African National Congress threatens to disrupt sales of Anglo’s unwanted South African assets, not least because the finance and mining ministries, which must approve any disposals, are distracted.
One idea proposed by a former South African mining minister is that Anglo could spin-off its non-core assets there into a company that could become a domestic “mining champion”. This company could have the Public Investment Corporation, the government-owned pension fund asset manager and Anglo’s largest shareholder, as a core investor.
Keen to use its influence, the PIC has demanded that shareholders be given the chance to vote on any Anglo asset sales. However, the PIC or other investors may struggle to put together a consortium large enough to acquire all of Anglo’s non-core South African assets.
And with the ANC in disarray, it remains unclear if South Africa’s government can speak with one voice about mining policy.
Mr Cutifani says the idea of a big unbundling of Anglo’s South African assets could have merit and change Anglo’s relationship with the country. “It could be a win-win but I have to sell it to all our shareholders,” he adds.
Meanwhile the stress on Anglo’s balance sheet is easing, as higher expected earnings due to improving commodity prices increases the company’s ability to hit its target to cut net debt below $10bn this year. JPMorgan analysts estimate Anglo’s net income will be 8 per cent higher this year than previously calculated, and 28 per cent higher next year.
Liam Fitzpatrick, analyst at Credit Suisse, says: “Where [Mr Cutifani] can point to success is in net debt. It is looking like he can hit the target to cut it under $10bn even without asset sales because of the way prices are going.”
A broader question, say some analysts, is whether mining companies such as Anglo — which was much more diversified when it listed in 1999 in London — can pick winners among from the array of commodities.
Mr Cutifani is standing by his strategy to focus on just three commodities, saying the long-term outlook for the price of coal and iron ore is poor. He also has concerns that regardless of commodity prices Anglo will never be a strong enough player in businesses such as iron ore, where BHP Billiton and Rio Tinto enjoy large economies of scale.
“We want the best quality portfolio in this industry,” he says. “That provides the financial possibility [for us] to rebuild this business.”
But with financial pressures abating, some analysts say that what was deemed “non-core” by Anglo at the start of the year may remain in its portfolio after all.
Heath Jansen, analyst at Citi, says: “I don’t think [Anglo] will back away from selling assets because an about-turn would look bad. But I don’t think they will execute on some of the larger sales.”