Anglo American to cut 19,000 jobs this year

Anglo American(AAUK-Q, AAL-L) plans to axe 19,000 jobs or about 10% of its global workforce this year due to trimmed-back production plans and rescheduled projects.

More than half the cuts will come from Anglo Platinum (ANP-L, AMS-J), the world’s largest primary platinum producer, in which Anglo American holds a 79.6% stake. (The platinum producer said on Feb. 9 it would eliminate 10,000 jobs this year.)

The majority of the layoffs in the group will be through natural attrition, redundancies and scaling back contractors, Anglo American says.

James Wyatt-Tilby, a spokesman for Anglo American in London, declined to say where the 9,000 layoffs outside Anglo Platinum would come from within the group, which operates in 45 countries across Africa, Europe, South and North America, Australia and Asia.

“We’re not currently talking about where those will be — not least since we’re engaged in what are always sensitive discussions with employees, unions and governments about them.”

He also says that while Anglo American believes it has taken sufficient measures on the head-count front, further cuts aren’t being ruled out. “It will depend on whether economic conditions change,” he explains.

Like most others in the business, Anglo American is scrambling to cut costs and stay afloat in a sea of companies that are being shipwrecked by the global financial crisis and sinking commodity prices.

In December, the London-headquartered company revealed that its capital expenditure plans for 2009 would be scaled back by about 50% to US$4.5 billion due to the downturn and that it would suspend its 2008 final dividend to conserve cash. (Dividends for 2008 totalled US44¢ per share, down from US$1.24 per share in 2007.) Anglo American is also suspending its US$4-billion share buyback program unveiled in August 2007.

Profit attributable to shareholders, or net income, fell 28.6% year-on-year to US$5.2 billion (from US$7.3 billion in 2007), while underlying earnings came in at US$5.2 billion, down 9.1% year-onyear from US$5.8 billion in 2007. Year-end debt excluding hedges reached US$11 billion.

The company hopes to achieve US$2 billion through cost saving and efficiency initiatives by 2011.

Lifeline for De Beers

Things have deteriorated to such an extent in the diamond sector that in February, Anglo American announced it had agreed to bail out De Beers with a two-year, interest-free loan of US$225 million as part of a US$500-million loan from the company’s three shareholders. (Anglo American owns 45% of the privately held company, while the Oppenheimer family owns 40% and the Botswana government 15%.)

Late last year, Anglo American also agreed to loans totalling US$118 million to the world’s largest diamond company under similar terms (interest-free for two years), as part of a US$300-million loan from the company’s three shareholders. About 5% of Anglo American’s total operating profit from core operations stemmed from diamonds in 2008.

De Beers is suffering from a perfect storm of contracting demand for diamond jewelry, diamond prices that have fallen by at least 40% since August, and an economic downturn that has frozen liquidity and demand for rough diamonds at the world’s key cutting centres.

De Beers’ mines in Botswana have been on care and maintenance since the second week of December in response to lower client demand for diamonds. The company’s mines in Botswana include Jwaneng, the world’s richest diamond mine by value, and Orapa, the biggest by volume. (Botswana is the world’s largest diamond producer by value.)

Debswana, De Beers’ 50-50 joint venture in the country, announced that it would shut down all operations and send workers home for 50 days, from Feb. 25-April 14.

“Not a single diamond has been dug out of the ground by Debswana since the middle of December,” a De Beers spokeswoman in London, Lynette Gould, confirmed by telephone.

Debswana accounts for two-thirds of De Beers’ rough diamond production. Last year, it produced about 32 million carats.

Dismal diamond sales in the fourth quarter rattled De Beers’ confidence and those of its major shareholders.

For the full year, De Beers’ total diamond sales, including industrial diamonds, reached US$6.88 billion, an increase of just 1% over total sales of US$6.84 billion in 2007.

Sales of natural rough diamonds hit US$5.93 billion, up from $5.92 billion a year earlier, despite record results in the first three quarters of 2008, according to Gareth Penny, the group’s managing director.

Cash available from operating activities plunged 17% to US$700 million, down from US$844 million in 2007.

Production fell to 48.1 million carats in 2008 from 51.1 million carats in 2007.

Charles Wyndham, founder of PolishedPrices.com the only independent publisher of diamond price-lists based on multiple-source transactions, told The Northern Miner that De Beers must go back to the drawing board and assess fundamental issues like strategies and governance.

“I would strongly suggest that they’ve got to really look at their business model and there must be huge questions asked about their management,” he says. “In my opinion, De Beers is using the economic turmoil to disguise its own failures and that’s what gets me so irritated.”

While Wyndham concedes that no one could have anticipated “just how cataclysmic this financial downturn turned out to be” and that it undoubtedly has had an impact on De Beers’ sales of a luxury item, the economic crisis “must not be allowed to camouflage the fact they have gone into this downturn hugely indebted.”

De Beers must repay about US$1.3 billion in debt in 2010 and another US$800 million from their shareholders in about two years, Wyndham points out.

“Even if they get US$3 billion in sales next year — how do they pay back US$1.3 billion in cash? That’s what interests me.”

De Beers’ Gould says the US$1.3-billion and US$800-million debt figures and their repayment schedule are “not something we are prepared to comment on,” but confirms De Beers’ total debt at the end of 2008 stood at $3.55 billion.

Apart from debt, Wyndham argues that while the scale of the downturn was totally unpredictable, “it was abundantly clear last year that rough diamonds were getting completely out of hand, which is exactly when De Beers put up its prices” by about 16%. “It was clear that their strategy and huge investments in that strategy and huge investment in trying to expand their production base just weren’t working.”

Wyndham also queries why De Beers has elected to close down its Botswana mines — the lowest-cost mines in its portfolio — when it could shut down higher-cost mines elsewhere.

“If they’re closing mines in Botswana, which are low-cost, what is going to happen to the Canadian mines?” he muses. “What’s happening with the South African mines, in particular Venetia?”

One reason De Beers might be closing its mines in Botswana is because the government gets roughly 85% of all revenues from Debswana’s mines, so closing those first, rather than De Beers’ 100%-owned mines elsewhere, makes the most sense from a financial point of view.

But Gould argues that’s not the case at all, noting the company is reducing production levels from all its operations around the globe in line with demand from clients. “Through production holidays and a renewed focus on maintenance and housekeeping measures at our mines, we will use this time to ensure the optimal and long-term sustainability of our mining operations,” she explained in an e-mail.

Gould adds that the 50-day shutdown at Debswana’s operations would allow the joint venture to continue to “sell-through the inventory it has built up as a result of lower than projected sales since the fourth quarter of 2008.” In the near term, the cost-saving measures “will secure jobs that might have otherwise been
at risk,” and in the longer term, “safeguard Botswana’s most valuable natural resource.”

Given that diamonds are rare and “getting rarer,” Gould asserts that long-term supply is predicted to fall short of increasing demand from emerging economies. “Diamond supply is finite and there are fewer known worldwide diamonds reserves than ever before. This is why Botswana is prudently managing its natural resource for the long term to ensure that diamonds continue to be available to meet demand in the future.”

Still, one question on everyone’s lips is how long De Beers shareholders like Anglo American will keep funnelling money into the diamond producer. “Anglo American is pumping in cash interest-free at the same time it’s stopping its dividend,” Wyndham says. “Are they going to allow things to bumble along the way things are and continue to pour good money after bad or are they going to get seriously involved?”

Indeed, Anglo’s patience with De Beers might start to wear thin if the economic downturn drags on and other commodities in its group continue to struggle.

‘Limited visibility’ ahead

In a statement to shareholders announcing the company’s full-year results, Anglo American chief executive Cynthia Carroll said that the “breadth and severity of the global economic downturn” and its impact were difficult to overstate.

“As we begin 2009, the economic outlook remains weak, with limited visibility and we are continuing to experience volatility and downward pressure on commodity prices,” she said.

Apart from De Beers and Anglo Platinum, the diversified mining giant has interests in commodities like gold through its 11.8% interest in AngloGold Ashanti (AU-N, AGD-L). (Anglo American recently reduced its shareholding in the gold producer for total proceeds of US$434 million.)

Anglo American has a world-class asset base with long life, low-cost mines.

Last year, its coal and ferrous metals divisions saw significant increases in operating profit, while operating profits from platinum and base metals were lower than in 2007.

The base metals division posted an operating profit of US$2.5 billion (26% of the company’s total operating profits from core operations) down 42% year-on-year due to lower prices for copper, nickel, zinc and lead, coupled with lower sales volumes and increased input costs.

The ferrous metals division reported a record operating profit of US$2.9 billion, up 105% year-onyear, due to higher iron ore sales volumes and higher iron ore, manganese and alloy prices. Ferrous metals make up about 29% of Anglo American’s total operating profit from core operations.

Coal, meanwhile, posted a record operating profit of US$2.2 billion (23% of Anglo American’s total operating profit from core operations), up a year-on-year 265%, largely due to higher prices for thermal and metallurgical export coal, and higher production.

The company’s platinum group reported operating profits of US$2.2 billion, down 17% over the year earlier due to lower metal sales and higher key input costs. Platinum makes up about 26% of the company’s total operating profits.

To help buoy its balance sheet, Anglo American has disposed of a number of non-core assets, including its investment in China Shenhua Energy for proceeds of US$704 million, Tarma Iberia (sold to Swiss cement group Holcim for US$186 million), as well as the sale of Namakwa Sands and 26% of both Black Mountain and Gamsberg to Exxaro Resources (EXXAF-O, EXX-J) for a total of US$353 million.