Anglo American’s radical rethink

VANCOUVER — Anglo American (US-OTC: AAUKY; LSE: AAL) intends to shrink the number of its employees by 63%, suspend its dividend, and close, sell or mothball its cash-flow negative assets to adapt to deteriorating market conditions.

“Last year … we took the view that it was likely commodity prices were going to be pressed further. Quite frankly we didn’t expect to see the rout to be so dramatic … we agreed we needed to put the foot to the accelerator and start moving the change,” Mark Cutifani, chief executive for Anglo, said during a conference call.

What he calls a “radical restructuring” program will transform Anglo American into a much smaller company with fewer assets. Its six divisions will be consolidated to three, placing its coal and iron ore assets into a “bulk commodities” division, its platinum and base-metal operations into an “industrial” division and its De Beers subsidiary will manage its diamonds business.

Anglo intends to shrink its portfolio by 60% from 2014, and generate US$4 billion by selling its low-priority assets, including its phosphate and niobium businesses.

It has also announced closure of its Thabazimbi iron ore mine in South Africa, and has placed De Beers’ Snap Lake diamond mine in the Northwest Territories on care and maintenance.

“Any asset that is cash-negative will not remain in the portfolio,” Cutifani said, not specifying which of Anglo’s operations may be cut, but added that many still have their “nose above the water line.”

“We have no control on the prices. We have to deal with what the market throws at us,” he said, predicting that market conditions may deteriorate further in the next six months. “What we want to do is make every post a winner in a tough environment so that we are creating a more sustainable and competitive business.”

“During the course of 2016 I would expect the die will be cast on probably 60% to 70% of the assets … with the cleanup occurring in 2017,” he said. “But we will break the back of it next year.”

On the operations side, Anglo anticipates the restructuring will reduce capital expenditures by US$1 billion in 2015 and 2016, and US$2.5 billion in 2017, partly as development for De Beers’ Gahcho Kue diamond mine development in the Northwest Territories and the R20-billion Venetia underground diamond project in South Africa near completion.

The company plans to pocket another US$1.6 billion in savings this year from general cost and productivity improvements at De Beers and its Kumba iron ore mine in South Africa. By the end of 2017, the company expects to deliver US$3.7 billion worth of overall efficiency improvements across its operations.

“There is a real sense of urgency in Anglo to deliver step-change improvement quickly, and we are delivering results. Our focus is on applying technical leverage to these core assets to release short-term productivity gains, reduce operational and capital expenditures and optimize production,” Tony O’Neil, technical director, said on the call.

Anglo will also withhold dividend payments for the next 18 months — a move that will save the company US$1.1 billion of cash flow per year.

“We have made the tough call in suspending the dividend, not a move that was taken lightly in terms of our shareholders but a move that was important we believe in terms of sending the right messages in terms of our actions to make sure we stay a strong company,” Cutifani said.

Anglo’s update came just five months after it announced a US$3 billion loss in the first half of the year, along with the sale of its Mantoverde and Mantos Blanco mines in northern Chile and its stake in Lafarge Tarmac, which delivered total cash proceeds of US$1.9 billion.

The company’s net debt guidance at the end of 2015 remains unchanged at up to US$13.5 billion, despite falling commodity prices.

In July, the underlying earnings before interest and taxes (EBIT) for the six months ending June 30 was reported to stand at US$1.9 billion — a 36% decrease from the comparable period in 2014 — largely due to sharply weaker commodities, and offset by weaker producer-country currencies and costs reductions.

Upon news of the restructuring, American Depository Receipts of Anglo fell 13% to US$2.39 at press time. The company has 1.4 billion shares outstanding for a US$7.7 billion market capitalization.