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Anglo American's octopus lives to fight another day

Feb 16 2017 12:34
David Fickling

Analysts expect Anglo American to post its first annual profit in five years. Shielded by that cloud of black ink, this octopus looks like it'll live to fight another day. Bloomberg columnist David Fickling explains...

In its heyday, the business empire founded by Ernest Oppenheimer was likened to an octopus.

The tangle of arms stretching from Anglo American has at times embraced the world's biggest miners of gold, platinum and diamonds; concrete plants; pulp and paper mills; banks; newspapers; car factories; a South African vineyard; and a stake in the brewer that eventually became SABMiller.

Chief executive officer Mark Cutifani dramatically turned his back on that legacy last February. The still-sprawling business would get rid of 60 percent of its workforce and two-thirds of its mines and focus on a core of diamonds, platinum and copper, he told investors. Operations in coal, iron ore, nickel, manganese, niobium and phosphates that collectively accounted for about 99.5 percent of the tonnage produced by the company would be put up for sale.

The plan was wildly popular with investors, making Anglo American one of the five best-performing stocks in the Bloomberg World Mining Index during 2016 - but it's now being mothballed. With commodity prices roaring back, the company will keep hold of coal mines in Australia and Colombia and Brazilian nickel and iron ore pits, people familiar with the matter told Kevin Crowley, Thomas Biesheuvel and Dinesh Nair of Bloomberg News.  It's still considering a spinoff of some South African coal and iron ore assets, the people said.

Mountain of worry: The yield on Anglo American's 4.875% 2025 bonds has recovered from its commodity-crash spike

It's not hard to see why the plan is being junked. Twelve months ago, Anglo American was in desperate straits. With net debt equal to almost four times its market capitalization and yields on its 4.875% 2025 bonds spiking to 13.5%, the company needed to prepare a fire sale to convince investors it could survive a drawn-out commodity crash. With that prospect averted, Cutifani can afford to shut up shop.

Regaining balance: Net debt-to-ebitda metrics of major miners have fallen dramatically over the past year

That's probably not quite as good news as it seems. One of the big attractions of Anglo American over the past year or so has been the prospect that a slimmed-down business might turn itself into a takeover target for a Rio Tinto Group, BHP Billiton, Vale SA or Glencore, should those bigger players switch back to growth from their current stance of soothing traumatized shareholders. An Anglo American that's failed to shed its less profitable operations in exchange for an improved balance sheet is a lot less attractive to potential buyers.

Years since Anglo American posted an annual profit

Investors shouldn't bet that it means an end to mining M&A, however. Quite the opposite: If anything, it's a sign that the pendulum is starting to swing away from the divestment drive of recent years that saw BHP Billiton spin off South32, Freeport-McMoRan dispose of oilfields and parts of African and US mines, and Glencore sell half its agricultural unit to Canadian pension funds.

Closing down sale: Underlying Ebit at Anglo American's non-core operations has been pretty healthy of late

While mining executives were pulling out all the stops to rebuild their balance sheets, the plea of fund managers to turn themselves into easily comprehended businesses with a few key commodities found a ready audience. Now that rebounding commodity prices are doing the hard work of debt reduction for them, the attractions of selling cash-flow-positive businesses at knockdown prices look a lot more dubious.

Back in black: Analysts expect Anglo American to post its first annual profit in five years in the 2016 year

When Cutifani releases annual results on Tuesday, analysts expect Anglo American to post its first annual profit in five years. Shielded by that cloud of black ink, this octopus looks like it'll live to fight another day.

* David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

anglo american  |  mark cutifani  |  mining


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