Anglo Australian

He’s neither Anglo, nor American. But its taken an Australian, Mark Cutifani – presumably with the assistance of a good old fashioned Kookaburra cricket bat – to to try and beat what was once the world’s premier mining company back into shape.

At the very least, the announcements made at Anglo’s investor day on Tuesday revealed the company –  and the executive team driving the change – had realised the cold, hard reality of the situation they found themselves in, and are prepared to do whatever it takes to see out the most brutal of winters in commodity markets. Well, almost everything. “I guess the point we are trying to make,” said Cutifani at the presentation, “is that in this sort of environment, nothing can be considered business as usual”.

So let’s start with the asset disposals.  The meandering and confusing acquisition strategy Anglo has pursued over the last decade was the first thing Cutifani addressed in his presentation. In order to begin correcting this, he elected to begin by disposing of the sins of the past. The company’s assets will reduce by approximately 60% to holding just 20 post the restructuring. The number of operating divisions will reduce by half to comprise just De Beers, Industrial Metals and Bulk Commodities.

Only those assets meeting the strict criteria of being a ‘Priority 1’ asset will remain.

The explicit statement of the criteria makes you wonder what the policy was before this. Cutifani added an important caveat – the asset has to be capable of delivering cash through the cycle, and that means being able to generate cash in the current environment. Outside of disposals, negative cash flow assets will either be placed on care and maintenance, or closed.

Minas Rio – the ultimate millstone around the company’s head – was deemed by Cutifani as not meeting the requirements of being a Priority 1 asset, despite entering its commercial phase. Ongoing permitting problems means that ramp-up for Minas Rio will see 18-21 million tonnes (Mt) being produced next year, versus previous expectations of 24-26Mt.

Kumba’s Sishen Mine continues to be a focus for more cost and capacity reduction. The mine is targeting 2016 production of 26Mt, some 10Mt lower than previously guided. From a profitability point of view, a massive reduction in waste movement (the material moved to access the ore) from 230Mt to 135Mt should allow the mine to reach a break-even target of $40/tonne next year.

Neither has De Beers been immune from change. Its response will see diamond production fall by over 10% to settle between 26-28 million carat in 2016 (see graph below). In true De Beers fashion, the company will aim to stimulate consumer demand for diamonds by significantly increasing advertising spend, including the promotion of the company’s own ‘It’s a long journey to become the One’ campaign. This focuses on the mine-to-market journey a diamond takes in its path from a De Beers-owned mine, through a De Beers-owned cutting and polishing facility, and then onto a De Beers-owned retail outlet.

The restructuring is expected to have a massive effect on headcount. By the end of this year, Anglo expects to have 135,000 employees, including contractors. Post restructuring, Anglo expects to employ just 50,000 people.

While this appears to be a conventional corporate reaction involving cut, defer and dispose, the company is being tactical on a commodity-by-commodity basis. Copper production has been identified as having the opportunity to grow. The company is targeting a 15,000 tonne per annum increase in copper from Los Bronces.

Its about solvency, stupid

Ultimately the impetus for these actions have been dictated by the state of Anglo’s balance sheet moving into the commodity rout. It was simply carrying too much debt. The proceeds of the disposals (circa $4bn), the suspension of the dividend (for the second half of 2015 and 2016), and the radical reduction in capital expenditure (see graph) are all designed to protect the balance sheet.

Net debt is expected to remain in the region of $13-$13.5bn at the end of this year, despite the fallout in commodity prices. Finance director Rene’ Medori said the medium-term target was to get net debt in the region of $10bn, despite forecasting negative cash flow of approximately $1bn next year.

And this is where the market really appeared to fall out of bed with management.

JP Morgan analysts expect that, while the operating costs and capital expenditure savings should see Anglo’s shares supported in the short term, the company’s cuts did not go far enough. “….these measures do not go far enough to challenge our fundamentally bearish [negative] view. Specifically, in the absence of higher commodity prices, a significant reduction in net debt from approximately $13bn as at the end of 2015 will only be achieved by a more aggressive expansion of disposal candidates, in our view,” wrote Fraser Jamieson and the rest of the mining team.

It appears the market had also been expecting an equity raise of some kind. The absence of one was an issue Cutifani was pointedly questioned on at the presentation.

Ryan Seaborne, a portfolio manager at 36One Asset Management, who do not own shares in Anglo, agrees with that sentiment. “I would have liked to see a capital raise being done, but at the subsidiary level. It’s the subsidiaries (like Kumba) that really need cash, and I think the minority shareholders should be asked to participate in that. Cutting the dividend is prudent, but they are still operating from a very high cost base.”

Have the changes been sufficient to change the investment thesis for Anglo? “They needed to take drastic steps. So I think Mark [Cutifani] is moving in the right direction, it’s unfortunate that its taken this long to make these decisions, but I think it will still be a painful road for shareholders in the short to medium term. So we won’t be shareholders just yet,” says Seaborne.

Anglo shares closed 10.7% lower at R72.76/share on Tuesday in Johannesburg, Amplats 7.1% lower to R170.74/share and Kumba 8.6% lower to R36/share.

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