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Help Anglo decide

Jan 14 2013 10:41 Jarred Myers

Company Data

Anglo American Plat Ltd [JSE:AMS]

Last traded 0
Change 20,19
% Change 0
Cumulative volume 199079
Market cap 104.15bn

Last Updated: 21-11-2014 at 04:28. Prices are delayed by 15 minutes. Source: McGregor BFA

ANGLO AMERICAN PLC [JSE:AGL]

Last traded 0
Change 13,9
% Change 0
Cumulative volume 3226058
Market cap 330.50bn

Last Updated: 21-11-2014 at 04:28. Prices are delayed by 15 minutes. Source: McGregor BFA

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STRATEGY is not complex. But it is hard. It’s hard because it forces people and organisations to make specific choices about their future.

This is the introduction to a new strategy book entitled Playing to Win: How Strategy Really Works by A G  Lafley, the legendary former Proctor & Gamble CEO, and Roger Martin, dean at the Rotman School of Management, his long-term strategic adviser.

This book, it seems, came out just in time for the Anglo American [JSE:AGL] review of Anglo Platinum [JSE:AMS] (Amplats).

So what are these hard decisions which need to be made?

Everyone seems to have an opinion as to what mines should and shouldn’t do, so I’m polling the hearts and minds of the nation to establish the way forward.

If all goes well, this data will empower the nation's new favourite former British colonial, Aussie mining boss Mark Cutifani, Anglo’s CEO elect, so that when he finally gets his feet under the table come April this year, all he need do is just lie back and relax for the next few years.

To put this all into context for those who aren’t salaried resource analysts – mining globally is a tough business and in South Africa, mining is a very tough business. When operations are losing money, then management needs to make tough decisions.

Since the global platinum industry is facing particularly tough times Amplats, the world’s largest digger of the yellow stuff, needs to change a few things.

This is in essence the platinum review which the mining world and Amplats' 54 000 workers are anxiously awaiting.

As explained by the nations lesser favourite former British colonial, American mining boss Cynthia Carroll, Anglo’s outgoing CEO: "We do have a platinum review and what we are working towards is creating a business that is competitive, profitable and sustainable in terms of what we can do in the communities and how we can support, on a long-term basis, employment."

Below is a brief overview of some of the options and trade-offs available to the Anglo board. After reviewing them, cast your ballot and have your say.

Using Lafley and Martins' book as a strategy guide, there are broadly three relevant options available: do nothing, do something or do everything.
 
1. The Waterloo Strategy – do nothing

This strategy pursues war on too many fronts at once. With cost inflation, low platinum prices and labour unrest, maintaining the status quo is the Amplats sub-Saharan version of Napoleon's final battle.

  • Do nothing, hoping all turns out for the best and that platinum prices miraculously rise and labour unions demand a 20% wage drop.
  • Risks insolvency and heavy cross-subsidisation from profitable operations, may lead to loss of 50 000 jobs.

 
2. The Something-For-Everyone Strategy – strategic downsizing

This strategy tries to capture the benefits of retaining profitable shafts, while closing down or mothballing loss-making and marginal ones.

  • Strategic shaft closures allow operations to remain profitable, as well as pushing the platinum price up through reduced supply.
  • Over 20 000 jobs may be lost at rationalised mines, leading to increased unemployment and a political backlash.
  • The industry will probably benefit from this through increased metals prices, but may suffer as a result of renewed strikes and union rumpus.
  • However, if successful it will clear the political minefield for other players regarding their mass-retrenchment phobia. It will also send a strong business-friendly message, which will encourage skittish investors and fence-sitters, bolstering foreign direct investment.


3. The Programme-Of-The-Month Strategy – spinning off

Spinning off involves lobbing Amplats from the mother ship and leaving her to fend for herself. This has proven an attractive strategy recently in the gold sector, and with such recent precedent will definitely have its proponents in the boardroom.

  • Unfortunately, while this strategy is a solution for shareholders it merely delays the tough decisions needed to be made and in all likelihood exacerbates them by reducing Amplats' future access to capital.
  • Over 30 000 jobs may be lost at rationalised mines due to profitability criteria being tightened and the inevitable closure of more shafts.
  • The industry will benefit from higher metals prices but undersupply in the market will lead to some irrational exuberance and long-term pain.

 
These are the broad brush strategic options facing Anglo. As Lafley and Martin wax poetic about strategy, “tough choices force your hand and confine you to a path, but they also free you to focus on what matters". That is how you play to win.

Cast your vote.


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