Tough times ahead for new Anglo CEO

2012-11-14 07:27

Johannesburg - Miner Anglo American [JSE:AGL] gave the market a taste of the trouble ahead for its new chief executive, raising cost estimates for its Minas Rio project and warning of lower profits from South African iron ore.

The Minas Rio iron ore project in Brazil is now expected to cost at least three times the original estimate.

Meanwhile, Anglo's majority-owned - and normally lucrative - Kumba Iron Ore [JSE:KIO] said in a statement minutes later on Tuesday that it expected full-year profit to drop at least 20%.

Kumba alone contributed almost half of Anglo's operating profit for the first half of 2012.

The double-whammy took Anglo's underperforming shares more than 4% lower in morning trade. At 15:52, the shares were down 3.5%.

"It is difficult to see light at the end of the tunnel for Anglo American," Citi analysts said in a note.

Last month Anglo announced the long-expected departure of its chief executive, Cynthia Carroll, and began the search for a replacement to take on what analysts and investors say is one of the toughest jobs in the business.

Her departure was blamed in part on Minas Rio, a 2008 attempt at diversification that turned out to be a tough, top-of-the-cycle deal.

String of delays

The Brazilian project has been hit by a string of delays and cost overruns. The miner - not alone in suffering from Brazil's permitting process - said that it would now carry out a cost review, including an independent assessment commissioned by the board.

The total cost is "unlikely" to be less than $8bn, the higher end of analyst forecasts, Anglo said.

Analysts have long said that spending at the Brazilian project could rise to at least $8bn from the most recent Anglo forecast of $5.8bn, already twice its original estimate.

Anglo did not alter its 2014 estimated production start date, but analysts expect it could run into the following year.

"Including the $6bn purchase price, Minas Rio is now a minimum $14bn investment," Liberum analysts said in a note. "While a blowout was anticipated, the market will still take today's news badly."

Anglo has also been pummelled by strikes at platinum operation Anglo Platinum [JSE:AMS] (Amplats), the world's largest producer of the precious metal.

It warned on Tuesday that 70%-owned Kumba was also still counting the cost of wildcat strikes. Combined with lower prices, the effect would drag down full-year profit by a fifth, the company said

Mounting strike costs

The profit warning underlines the mounting costs of a wave of often violent strikes that have swept South Africa's mines.

Kumba, one of the world's top 10 iron ore producers and Africa's largest, lost about 2.6 million tonnes of finished product at Sishen, where an illegal occupation halted operations for more than 2 weeks.

Operations resumed on October 20, but the company said that output was still being hampered by low attendance, which it said was caused by intimidation and threats to workers.

Kumba had been thought safe from the strike contagion because, in December, employees with at least five years' service were each given a lump sum of about R345 000 after tax as part of a share scheme.

The payments, overseen by Chris Griffith, now Amplats' CEO and touted as a candidate for Anglo chief executive, represented a fortune to workers earning as little as R7 000 a month.

"I think Kumba is one of the better assets for Anglo and is one of the companies with better expectations going forward," said Abri du Plessis, chief investment officer of Gryphon Asset Management in Cape Town.

"A new (Anglo) CEO is not going to have different problems from anyone else operating mines here. The labour problems will be sorted out countrywide and sector wide."

  • Mike - 2012-11-14 07:48

    This is the equivalent of Rothschild's blood in the streets. Time to unload, methinks.

  • mark.haupt.31 - 2012-11-14 08:20

    Yup, he's correct as that light might just be an oncoming train, the gravy train, and it's full to capacity with little chance of being able to stop any time soon.

      rajesh.sukha - 2012-11-14 08:57

      Tell the miners living in shacks and sharing pathetic ablution facilities that the gravy train means anything to them...them compare griffiths and carrolls incomes to that of the workers and you tell me where the gravy train sist. $8bn lost would have topped up every worlers inocme many times over.

      mark.haupt.31 - 2012-11-14 10:20

      @Rajesh, read the part about the 345K and then get back to me. When did you last get that kind of handout just for working for 5 years for the same company?

      amanda.victor.92 - 2012-11-14 10:24

      @Rajesh - and if Anglo start closing mines, who's going to give them jobs???

      strikeback.strikeback - 2012-11-14 11:23

      @Rajesh, stop concerning yourself with what the CEO's earn. These workers are not the CEO's and should not be compared to them. I can assure you that their education levels are slightly lower, and so their worth to the company. The problem here is that they were given all the facilities they now complain about. Most people have to get their own. By the way - the ablution facilities was not build pathetic, they were abused and made pathetic by the workers themselves. Normally they burn it and then wonder where it has gone.

  • riotousr - 2012-11-14 09:51

    Where is my R345K share scheme?

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