ANGLO American may well have defended itself against Xstrata's nil-premium merger bid this year, but the group remains vulnerable if only because the investment community views it the weakest of the major diversified companies.
I take my cue from an RBC Capital Markets report, which placed Anglo bottom of a list based on criteria that included commodity mix, balance sheet strength and current valuation.
According to the RBC team, using the collective knowledge of analysts in Canada and the UK, BHP Billiton and Xstrata topped the list which also used growth profile as an important assessment criterium. Rio Tinto, Teck Resources, and Vale followed BHP and Xstrata and lastly, Anglo.
Anglo American, which RBC identified as a sector underperformer, was given 12-month target of £24.00 per share. RBC's report was published on December 8. Anglo is currently trading at £26.48/share.
"Impediments to our target price include Anglo's high level of net debt, fluctuations in commodity prices, greater-than-expected mine operating, and new project construction costs and increasing energy, material and manpower costs," said RBC.
And while it thought the outlook for De Beers - in which Anglo has a 45% stake - had improved, it believed the "major impediment" to Anglo was the under-performance of Anglo Platinum and its "stubbornly high" costs.
The question, then, is whether Anglo and its newly seniorised board can get to grips with Anglo Platinum which comprised about a fifth of Anglo American's turnover in its latest financial results, but contributed only 9% of earnings before interest, tax, depreciation and amortisation.
Board flattened by Eskom?
The appointment on August 1 of John Parker, who replaced Mark Moody-Stuart as Anglo chairperson, was seen as one of the single most important steps to keeping Xstrata at bay. (The other was the fact that Xstrata wouldn't add a cash - or some other kind - of underpin to its takeover offer).
Within a couple of months, Parker strengthened the Anglo board with Jack Thompson, a former Barrick Gold executive, and Ray O'Rourke who founded Laing O'Rourke, the largest privately-owned construction outfit in Europe.
Like Parker, O'Rourke and Thompson represent gritty, big business. Parker himself knows what it is to have his back to the wall. Well, I'm imagining he does: his knighthood was for services to shipping which has been on the slide in the UK since the end of the Second World War.
But for all these executive brains and brawn, Parker and his board have to accept that any successes in lowering Anglo Platinum's costs are going to be hurt by Eskom price hikes if indeed they are approved by South Africa's electricity regulator, Nersa, in 2010.
There's also the double whammy effect that electricity costs, which increase on an incremental basis from now until 2013, will slowly but inevitably choke off Anglo Platinum's project pipeline.
Anglo Platinum is the gorilla in the jungle, but it's really no good having the most ounces of platinum in the ground if there's no prospect of mining them.
And yet there are crumbs of hope.
It comes in the form of the highly respected JP Morgan precious metals mining team - Steve Shepherd and Allan Cooke - which selected Anglo Platinum as its top pick for 2010.
They are encouraged by the operational changes implemented by Neville Nicolau, Anglo Platinum's CEO. And they also think that the platinum market will be extremely helpful in 2010.
"We believe the ingredients may well be in place for the platinum group metals basket to overshoot mid-cycle prices in the next couple of years and, if history repeats itself, equity prices should perform strongly in response to this," JP Morgan said in a Miningmx report published on December 14.
"JP Morgan's SA equities strategy to be overweight on platinum in 2010 reflects our expectations for this," it said.
Supply will also be increasingly affected by government-backed intervention of one type or another. Perhaps not good news in itself, but the consequence of tightening supply helps Anglo Platinum's price received, provided the rand achieves a more accustomed level, say R8.50, or even R8, to the dollar.
Finally on a relative basis, JP Morgan expects Impala Platinum to struggle at its Rustenburg mine where it has identified management issues.
But Anglo's most extreme worry might be a return in six months of Xstrata. Perhaps, by then, Xstrata might be in a better position to sweeten its offer for Anglo American. And if it doesn't return to Anglo, RBC is of the opinion it will look to grow by acquisition elsewhere.
"Acquisitions have been, and will likely remain, a key plank in Xstrata's strategy. The senior executive team has delivered impressive results with a business model that supports a more flexible and aggressive strategy than its peers. Future growth will likely depend in large degree on the continued success of the current team," it said.
- Fin24.com