Cutifani strives for ‘new’ Anglo American after tough 2015

In a video message to shareholders, Anglo American (US-OTC: AAUK; LSE: AAL) CEO Mark Cutifani said the company will dispose of an additional US$3-$4 billion in assets this year after posting a net loss of US$5.5 billion in 2015.

Underlying earnings before interest and taxes plunged 55% to US$2.2 billion last year, while impairments during the second half of the year reached US$3.8 billion. The company ended 2015 with net debt of US$12.9 billion.

Cutifani said the company expects to reduce net debt to less than US$10 billion by the end of 2016. In addition to the asset disposals, the mining executive said more than US$1.9 billion of cost and productivity business improvements would position the company to deliver positive free cash flow this year.

“We are taking decisive action to sustainably improve our cash flows and materially reduce net debt,” he said in the Feb. 16 video. “At the same time, we will be focusing on our most competitive assets — in diamonds, platinum group metals and copper.”

Cutifani noted that these “unique combination of assets” would have the advantage of “benefiting from the ongoing shift away from infrastructure investment towards consumer-driven demand, positioning Anglo American for these expanding markets.”

In the meantime, the company’s bulk commodities division, which includes its Brazilian iron ore business and non-core coal assets, will be “managed for cash generation or disposal,” while “disposal processes” are already under way in nickel, niobium and phosphates, as well as the Moranbah and Grosvenor metallurgical coal assets.

In addition, Cutifani said the company was making progress with its previously announced disposals of various coal and platinum assets in South Africa and Australia.

With its plans to move from 45 to 16 core assets across three business units, Anglo American expects to “streamline” its operational portfolio from 11,500 roles to fewer than 5,000 roles, which should add up to about a 60% reduction in costs, he said.

Cutifani noted, however, that given the challenging environment and market conditions, the company will only complete asset sales that deliver “appropriate value” for its investors.

In terms of spending plans this year, the company expects to cut total capex by 25% to less than US$3 billion. Capex in 2017 will be trimmed a further US$500 million to US$2.5 billion.

“We are creating the new Anglo American: streamlined, resilient and positioned to deliver the sustainable value that we all demand and expect,” Cutifani declared.

Analysts at Investec Securities in London described Anglo American’s strategy as “putting the patient in intensive care.”

“The news of further amputations in order to improve the chances of long term survival appear symptomatic of an environment that is rapidly changing the face of the mining industry globally.”

On Feb. 18, Standard & Poor’s added Anglo American to its ‘junk’ pile of corporate credit ratings, lowering it to BB/B from BBB-/A-3. The move followed earlier downgrades of the company’s debt by Moody’s Investors Service and Fitch Ratings.

“We anticipate a prolonged downturn for the mining industry and negative free operating cash flows at a significant number of … Anglo American’s assets, causing us to assess its business risk profile at the lower end of the satisfactory range,” S&P said in a statement.

“Although the [restructuring] program should enable Anglo to lower its debt levels, the depressed market means that we view the proceeds and timeline as very uncertain … Because other companies are also seeking to divest assets at this time, we remain very cautious about the timing of any sales and the level of proceeds they will generate.”

The same day as S&P’s downgrade, Anglo American announced offers to purchase for cash a capped amount of two series of its U.S. dollar denominated debt securities with an aggregate nominal amount outstanding of US$1.35 billion. 

Investec’s analysts called the move “sensible” and “logical.”

“The quantum is a material component of the US$7.6 billion due over 16/17/18,” they wrote in a brief comment. “Anglo is funding the purchases from its available cash, which stood at US$6.9 billion at the end of 2015.”