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High risk, high reward

Jan 15 2013 15:53 *Kevin Allison
Amplats worker

Amplats worker (Picture: AFP)

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FOR ONCE, Anglo American [JSE:AGL] has delivered the goods.

The restructuring unveiled by the embattled miner's platinum arm on Tuesday was more aggressive than anticipated.

Investors should applaud Anglo's vigour in tackling the poor performance of Anglo Platinum [JSE:AMS] (Amplats). But fraught South African labour relations make it a high-risk, high-reward strategy. The tenure of incoming Chief Executive Mark Cutifani will be defined by his success in executing the plan he inherits.

On the plus side, the world's leading platinum producer finally has a coherent approach for dealing with the fierce cost pressures buffeting one of its biggest businesses.

It wants to mothball two underperforming mines in South Africa's platinum belt and sell one other, at a cost of 14 000 jobs - about a third of its platinum workforce. Annual production will drop by roughly a fifth, or 400 000 ounces. Analysts were expecting a reduction of 250 000 oz.

Instead of hoping that rivals might pull capacity, Anglo is proactively shutting some of its costliest production and improving industry economics in a single go. The roughly $400m of expected annual cost savings and efficiency gains by 2015 should put the loss-making platinum unit on a path towards breaking even, said Macquarie.

The obvious risk is that the cuts could spark a repeat of the crippling strikes that pushed Amplats to a loss last year. Labour activists have warned that closing even a single shaft could spark industrial action.

If Anglo can expect an aggressive response no matter what the size of the restructuring, it probably feels it should make the most of it.

A plan to spend $100m finding new jobs to replace those lost - enough to cover about two-thirds of a year's wages for affected workers - may help take away some of the sting.

But incoming CEO Mark Cutifani is still likely to face a drawn-out and hair-raising game of chicken with militant unions.

The fact that he doesn't start for another three months won't make the political manoeuvring any easier.

The shares' subdued response - roughly flat - suggests investors are rightly wary.

Outgoing CEO Cynthia Carroll suffered for failing to get on top of big strategic moves launched early in her tenure. That should focus Cutifani's mind on seeing this restructuring through.

* Kevin Allison is a Reuters Breakingviews columnist. The opinions expressed are his own.

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anglo american  |  amplats  |  mark cutifani  |  strikes  |  jobs  |  mining
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