Anglo in dramatic portfolio shake-up

IOL pic feb17 br Kumba 2641 BLOOMBERG An employee uses a front loader to shift iron ore into piles at Sishen opencast mine, operated by Kumba Iron Ore. File picture: Nadine Hutton, Bloomberg

Johannesburg - Diversified mining giant Anglo American yesterday announced a dramatic shake-up of its portfolio after envisioning the disposal of $6 billion (R94.76bn) of non-core assets by the end of the year and the unbundling of Kumba Iron Ore in 2017.

But analysts said they were wary of the timing of the “potential of a fire sale”.

Anglo American said 68 000 employees would be transferred to new owners as it streamlined its core portfolio to 16 from 45 assets as it revamped its portfolio to focus on diamonds, platinum group metals and copper. It would prioritise the mining of consumer-driven materials.

Read: Anglo American to sell subsidiary

Anglo American, which owns Anglo American Platinum and De Beers, had flagged the overhaul of its portfolio in November, but the market had not expected such a dramatic overhaul.

This comes at a time when the global mining industry is buckling under the pressure of collapsed commodity prices and rising debt and as investors exit investments associated with risk.

The slowdown in demand for commodities from China has hurt mining firms.

Debt burden

Abdul Davids, the head of research at Cape Town-based Kagiso Asset Management, was cautious about the timing of the restructuring.

“We think that the primary rationale for the restructure is to reduce the group’s substantial debt burden, but we are wary of the potential of a fire sale that might not be in shareholders’ best interests, especially with some of the companies earmarked for disposal possessing highly quality assets,” Davids said.

“In addition, the timing of these disposals are arguably at the bottom of the commodity cycle, which means that Anglo’s shareholders will not enjoy the upside when the cycle for these disposed commodities turn up,” he added.

Ian Woodley, the mining fund manager for Old Mutual, said the Anglo sale of all its coal assets had come as a surprise. “They have taken some people by surprise by selling assets that people thought they would keep. They had good quality metallurgical coal assets in Australia. Anglo will be a very focused portfolio. Geographically, the operations will be in southern Africa and South America.

“The concern is: are they getting rid of assets at the wrong time of the cycle? Is this the right time to sell? My concern is how they will extract full value from the sale of the assets,” Woodley said.

Read: Moody's cuts Anglo's debt rating

Anglo American chief executive Mark Cutifani said yesterday that the company was taking “decisive action to sustainably improve” its cash flows and materially reduce net debt, while focusing on its most competitive assets.

“We are already engaged with parties interested in several of our assets, but we will only complete those transactions which deliver appropriate value for our inventors”.

“So while we have accelerated our disposal process, and given our targeted positive free cash flow and our robust liquidity position, we will take the appropriate time to secure value outcomes from the disposal programme,” he said.

Anglo said as part of the restructure its controversial R99bn Minas Rio iron ore project in Brazil would be classified as a non-core asset. It remained committed to completing the project in time, Anglo said.

Minas Rio has previously been dubbed one of the blunders weighing heavily on the company’s balance sheet after reporting budget overruns.

Anglo said it would work with Kumba to evaluate options for the exit and how the business could be set up as a stand-alone entity that would create sustainable value for its stakeholders, and was selling its coal prices at the correct price.

Junk status

Ratings agency Moody’s Investors Services on Monday downgraded the company’s credit rating to junk status, citing the deterioration of commodity prices and doubts on how long the company would take to cut debt.

It lowered Anglo’s senior unsecured ratings to Ba3 from Baa3, and said a target of raising $4bn by selling mines would be difficult to achieve. However, Cutifani said the company would achieve $1.9bn of cost productions this year and had cut costs by 27 percent.

“We think that in the next six months Moody’s will have reviewed the ratings,” he said.

Anglo American’s share price closed at 0.37 percent down to R88.96. Kumba’s share price rose 7.43 percent to R58 on the JSE yesterday.

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