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300% rally has investors question Anglo's plan to sell

Oct 27 2016 16:15


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Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

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Johannesburg - When a company quadruples in value over nine months, it’s unusual for the biggest investors to say management has the wrong strategy. But that’s exactly what’s happening with Anglo American [JSE:AGL], the mining company that is the UK’s best-performing blue-chip stock this year.

In February, Anglo was reeling from a broad slump in commodities that sent its shares to an all-time low and compounded a mountain of debt. To stanch the bleeding, the company proposed selling more than half its assets, including coal and iron-ore mines that had plunged in value.
Almost as soon as the plan was announced, prices began recovering, so much so that investors including top shareholder Public Investment Corporation urged executives to reconsider.

"The desperation levels are not there anymore," said Hanre Rossouw, a Cape Town-based fund manager at Investec Asset Management, whose investments include Anglo shares.

"The strategy was predicated by balance sheet distress and the way to solve it was to sell assets. That became the strategy. That’s the wrong way to go about a strategy."

For now, the company remains committed to selling assets even as the business benefits from the jump in prices.

In July, chief executive officer Mark Cutifani said that while Anglo was surprised by the rally, it still expects longer-term pressures from too much supply. He isn’t alone.

Last week, rival producer BHP Billiton said that despite the gains, iron-ore and coal will remain in surplus for the short term.

"We will continue with the program we currently have," Norman Mbazima, who is in charge of Anglo’s asset sales in South Africa, said in an interview on October 5.

What may change are the company’s "views on value" for those assets, said Mbazima, who is deputy chairman of operations in the country.

Exit strategy

Anglo’s strategy is to exit commodities such as iron ore, coal and nickel to focus on diamonds, copper and platinum. While the idea was born during a period of stress, it reflects a desire to focus on markets where the company has the best assets in terms of scale and profitability.

For example, Anglo is the world’s largest diamond producer through its De Beers unit and operates the Jwaneng mine, the biggest anywhere. That gives the company a degree of market power that management doesn’t believe it can replicate in iron ore, where rivals such as BHP and Rio Tinto Group have mines that produce more and at a lower cost.

Anglo also is the world’s biggest platinum producer.

But while investors initially cheered the plan, their enthusiasm waned as prices began rebounding.

Coking coal, used in blast furnaces by steelmakers, more than tripled this year, while thermal coal favoured by power plants jumped 93% and iron ore used to make steel advanced 42%.

Best performer

After five straight years of declines, Anglo shares are surging. They’re up 300 percent since the end of January and 272% for the year, by far the biggest advance on the FTSE 100 Index.

Glencore, another mining company, was the next-best performer, up 172%.

With no deals yet for most of the assets Anglo wants to sell, some investors are calling for management to hold off. One of the more vocal critics is Dan Matjila, the chief executive officer at Pretoria, South Africa-based Public Investment, which owns 13.4% of the shares.

"We are not in favour of selling," Matjila said in an interview. "It would be better to hold on until the price improved."

Along with the commodity rally, production costs per unit dropped by more than 20% at Anglo’s diamond and platinum businesses in the first half. That’s helped bring the company within reach of its debt target of $10bn by year end, compared with $12.9bn on December 31, 2015.

Anglo spent billions of dollars during the commodity bull market to expand, including $14bn on the Minas Rio iron-ore mine in Brazil. The strategy soured as rising output overwhelmed demand. Iron ore prices tumbled 80% from a peak in 2011.

An attempt to offload a nickel mine in Brazil was stalled because bids from potential buyers were too low, people familiar with the matter said in August. The process of selling coking-coal mines in Australia also was hindered, partly because off the rally in prices, people familiar with the process said.

The sale could now be completed as soon as this month, people with knowledge of the matter said this month.

Those delays signal that Anglo wants to get the best price for its assets. The lone sale so far, the niobium and phosphate business, went for $1.5bn earlier this year, more than analysts expected.

"It seems odd to me that people are panicking to sell assets when the industry is under pressure," said Andrew Lapping, who helps manage $34bn as chief investment officer at Cape Town-based Allan Gray.

"I’m sure they’ll probably reassess what’s core and what’s non-core in six months’ time."

Anglo is no longer being forced to sell, said Paul Gait, an analyst at Sanford C. Bernstein in London. While the company may still go ahead with its plan, the risk of a fire sale at the bottom of the cycle has dissipated, he said.

"Whilst management have reiterated their commitment to the three commodity end-goal, we expect there to now be much more flexibility with regards to the portfolio composition," Gait said in a note to investors last week.

Coal and iron ore generated about $3.5bn in revenue during the first half, a third of Anglo’s total. Its core assets accounted for $1.4bn in earnings before interest, taxes, depreciation and amortization, while non-core businesses generated $1.1bn, Gait estimated.

"Who would have thought rising prices would put them in such difficulty," said Ben Davis, a analyst at Liberum Capital in London.

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