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Johannesburg - Anglo American [JSE:AGL] could cut its dividend for the first time since 2009 as tumbling commodity prices reduce the cash available to pay investors.
Analysts at Barclays, JPMorgan Chase & Co and Investec have all said the company may make a cut when it reports first-half results next week, without specifying the scale of any reduction. Anglo, which spent $1bn on dividends in 2014, hasn’t reduced the payout since it was halted during the global financial crisis.
The speculation underscores the challenge faced by chief executive officer Mark Cutifani, who is seeking to almost double the company’s return on capital by improving mines and selling assets. He’s doing that at a time when prices for copper, iron ore, thermal coal and platinum, representing half of Anglo’s revenue last year, are trading in or close to bear markets.
Cutifani “has been dealt a very rough hand,” said Gavin Wood, the chief investment officer of Kagiso Asset Management in Cape Town, which manages $6bn of assets, including Anglo shares. “They need to cut back on costs, on capital expenditure, preserve cash and weather it out.”
Shares of Anglo retreated 28% this year in London, compared with a 9.9% drop in the Bloomberg World Mining Index of 79 companies. The company is forecast by Investec to report negative free cash flow of $1.6bn this year, more than double last year’s level.
Dividend suspended
The shares fell 17% on the day Anglo suspended the dividend in 2009. The payouts were reinstated the following year and the company paid a combined interim and final net dividend of 85 cents a share in each of the past three years, implying a current yield of 7%, data compiled by Bloomberg show.
The dividend “is going to be under pressure” because it would likely increase debt, said Hanre Rossouw, who helps manage $120bn of assets including Anglo shares at Investec Asset Management in Cape Town. “Where commodity prices are at the moment, maybe it doesn’t make sense to take on more debt.”
Since the sale of its 50% stake in Lafarge Tarmac for $1.5bn in July 2014, Anglo has sought to sell platinum mines in South Africa, copper assets in Chile and thermal-coal operations in South Africa and Australia.
“We are 18 months into a three-year turnaround program that is fundamentally repositioning Anglo American,” James Wyatt-Tilby, a company spokesperson, wrote in an e-mail. He declined to comment on the dividend.
Biggest investor
Cutifani has support from the company’s biggest investor, Public Investment Corporation, which manages South Africa’s government employees’ pensions and has an 8.3% stake. It said in statement that Anglo remains one of the fund’s key long-term investments.
The CEO has also made progress in improving the efficiency of the company’s mines. Cutifani pointed to improved productivity at its Los Bronces copper operation in Chile and its Grasstree and Moranbah coking-coal mines in Australia in a May presentation.
When Cutifani was appointed, “he came in with a clear mandate to fix the operations,” Rossouw of Investec said. “Anglo has gone from continually missing operational targets to consistently beating them.”
