David McKay
Anglo American plc appears to be winning greater acceptance in its adopted country after shifting its primary listing to London during 1999. This follows a vigorous shakedown in the group’s non-resource businesses as well as signs that the long-standing and unpopular cross-holding between Anglo and De Beers is to be unbundled. These developments were topped by an announcement earlier this week of a 53% increase in full-year headline earnings to $2-billion.
Criticism that Anglo American should have weeded out its weaker assets before moving to London appears to have provided management with the opportunity to prove its mettle.
“The group has achieved what it set out to do: dispose of non-core assets and unbundle the relationship with De Beers,” says one analyst.
While the unbundling of De Beers is not a fait accompli, the urgency with which CEO Tony Trahar has addressed the matter has surprised and impressed analysts.
Anglo’s sprawling empire of industrial, mining, financial and even agricultural holdings was a function of its historical position in South African business. The seemingly omnipotent group commandeered many of the businesses that offshore companies forsook during the disinvestment that characterised the latter stages of apartheid in the 1980s.
Back in the United Kingdom, the diversity of Anglo American’s interests is considered anathema; clearly, the irony of the UK’s distaste for Anglo’s empire-building is unnoticed by a country still subconsciously nursing the loss of its own.
Now, however, Anglo American has a more identifiable shape. It is a resource-focused stock with major earnings contributors typically comprising large-scale mining operations, as well as an industrial minerals company and local and international forestry assets.
Disposals of non-core assets in the 2000 financial year totalled $1-billion. This does not include the sale of three-quarters of its holding in financial services company FirstRand, valued at $750-million. Non-core businesses in Anglo still include Tongaat-Hulett, for example, which Trahar says may be more difficult to sell in the short term. Nonetheless, the sense is that Anglo is edging towards the end of its disposal programme.
Financially, the group is iron clad. Available cash flow in the past financial year totalled almost $3-billion. This is largely owing to surging palladium prices enjoyed by Anglo Platinum in which the parent has a 51% stake and record diamond sales by De Beers.
Ability to grow by acquisition is also significant: about $4-billion was spent by Anglo American in acquisitions in the 2000 financial year, lifting net borrowings to $3,6-billion and creating a debt to equity ratio of 16,5%. Financial director Tony Lea says there is room to increase gearing to 20%, suggesting there’s an appetite for more acquisitions or to finance more grassroots projects.
Yet for all its volume and weight, the group is not the finished article. Analysts question the exposure to gold Trahar says the group remains committed and wonder, too, whether Anglo’s long-term game is to take out minority shareholders in its listed subsidiaries.
And if Anglo is to evolve further it may need the quantum implied in a possible bid for control of its UK rival, Billiton plc.
Trahar says the group has not been buying Billiton shares to add to its 7,1% stake already gained from the FirstRand exchange with the Rembrandt Group. But the combination of Billiton’s management, highly rated in the UK, and Anglo’s diverse asset base could provide the ideal opposition to Rio Tinto, London’s darling mining counter and the company Anglo wants to supplant as the premier UK resource stock.
Questions also persist over certain Anglo operations. Its base metal division, Anglo Base, has been disappointing. Record earnings for the last financial could not mask Trahar’s irritation with a division that has been earmarked for growth.
The underperformance of the Lisheen zinc mine in Ireland and the Anaconda Nickel enterprise in western Australia have definitely not run to script. Another base metal operation, Salobo in Brazil, has so far overshot its capital budget that it’s thought the project will never make money and thus it stands in mothballs.
Anglo Base reported an operating loss of $41-million, a reduction of $215-million year-on-year, owing to write-downs of $237-million on Lisheen, Anaconda and Salobo.
On the face of it, however, in spite of these big blots on its results and the private disaffected mutterings, Anglo seems determined to get much bigger in base metals. It continues to spend heavily on this business, which at the end of last year already had operating assets valued at $2,1-billion. The biggest chunk of the group’s total capital expenditure went on base metals last year $410-million, well ahead of the $272-million spent by the platinum operations in second place. Also, Anglo is preparing to spend another $3-billion on base metals projects that have either been approved or are waiting for approval, half as much again as the $2-billion for the platinum business.
Commenting on the outlook for the current financial year, Trahar said there was increasing evidence of a slowdown in the United States economy heralding a decline in commodity prices.
However, he was hopeful the US would recover in the second half: “Recent moves by the Federal Reserve Bank to stimulate US growth could lead to a resumption of global economic growth in the second half of 2001.”
There may be a recovery from the lower prices currently being experienced “in some commodity sectors”, Trahar said.
He also raised the prospect of further acquisitions by Anglo American: “In addition, the group’s balance sheet is conservatively geared and we will continue to look for opportunities to add shareholder value during the coming year.”