Is the new Anglo worth buying?

According to Mark Cutifani, Anglo’s CEO, the restructuring of the business is the largest of its kind in its nearly 99-year history.

But the plans announced on Tuesday are ultimately being driven by the need to fix its balance sheet, and that means reducing the company’s giant net debt of $12,9bn. (Net debt is equal to long-term debt plus short-term debt minus cash). Anglo no longer has an investment grade credit rating, and for a resources business of its size, the lower cost of funding associated with its credit rating is of vital importance. The company hopes to reduce net debt to below $10bn this year, and to $6bn in the medium term.

But the changes will also do other things for the business. For one, it will allow the company to focus on running its “core” (defined as De Beers, copper and platinum) assets as efficiently as possible. Anglo has 55 assets at the moment, spread across base and bulk minerals, precious metals and stones, and industrial metals. There will be just sixteen when the process is complete. This, in theory, should bring focus on the operational efficiency the group has long craved.

Besides increased focus, further cost savings will be enacted through the reduction in headcount for the global support services (falling from 11 500 to 5 000), the combining of head offices in London with De Beers, and the voluntary pay freeze for all management level employees across the group (the duration was not stated).

The restructuring will also re-orient the company’s exposure away from infrastructure towards more consumer-oriented commodity demand. By the company’s own expectations, 78% of operational profits from the new core will come from consumer-oriented commodity consumption in 2016.

Based on the 2015 results, the core realized $2.8bn in Ebitda (vs. $2bn for the non-core assets).

But the problem is that the transition will take time. While adamant the company would not tap the equity market (rights issue) or bond market for more capital, it is tempting fate by making its plans dependent on the realisation of asset disposals to get it to meaningfully address its debt position. It is planning on raising $3bn-$4bn from asset disposals in 2016 and $7bn in total. Minas Rio is not even on the disposal list after Cutifani committed Anglo to seeing out the ramp-up of the mine, a process which will take another three years.

“Still a jam tomorrow story” is how analysts at JP Morgan described the announcement. “This is a more aggressive roadmap to reduce leverage to ~2.5x, but is still reliant on asset disposals and Anglo remains a minimum two year restructuring, in our view… leaving minimal headroom if prices fall further. We also remain sceptical on execution, not least since disposals are unlikely to be coveted by peers and deals to date have been underwhelming,” they wrote in a note to clients.

Ben McEwen at CIBC World Markets raised similar concerns. “While further asset sales will alleviate some of this pressure, we retain questions on the realisation of these very sales given a paucity of buyers in this depressed commodity price environment. If these sales are not realised, net debt will expand further from current levels, meaning the valuation multiples on future sales will need to be even more elevated to make a difference to the net debt trajectory. We retain our Sector Underperform rating.”

“This is a very big and bold step,” says Stanlib Resources fund manager, Kobus Nell. “It’s clear they are transforming the face of Anglo. But you have to ask the question whether doing a rights issue would be a better option than trying to sell assets in this market? So there are serious questions about value destruction over the long term about trying to sell assets now. When you take these desperate measures you are trying to monetize assets at the wrong time. But they have to reduce their net debt.”

So while promising, its not enough just yet.

Anglo closed  1,25% higher in London and 0.37% lower in Johannesburg on Tuesday.