As a company Anglo American is moving in the right direction, but it will need a “mega” merger if it is to make a quantum leap in growth, says Chris Law, a mining analyst at HSBC Securities in London.
Law spoke to the Mail & Guardian after the diversified mining giant released its annual results on Wednesday. Describing the results as “very good”, he said the London market was finally waking up to his long-held contention that Anglo “is a great group with great assets”.
Anglo’s market capitalisation is £19,2-billion on the London Stock Exchange. Its peers, Rio Tinto and BHP Billiton, have, because of the nature of their dual listing in London and Australia, market capitalisation of £22-billion and £31-billion respectively.
South African analysts have suggested that if Anglo is to catch up with BHP Billiton in size, it will need a tie-up with Rio Tinto.
Recent press reports have also speculated on a merger with Brazilian company CVRD, the last of the top four world players in diversified mining, which has a market capitalisation of $20,4-billion on the New York Stock Exchange, or £11-billion. A merger between Anglo and CVRD would create the world’s largest iron- ore producer.
In an interview Anglo CEO Tony Trahar dismissed speculation about a possible merger with CVRD. “We are the 13th largest company on the London Stock Exchange,” Trahar said, noting that Anglo would continue to grow by investing its spare cash.
At the media conference to announce the results, the company unveiled a $6-billion expansion portfolio spanning gold, platinum, paper and packaging and ferrous metals, which Trahar frequently described as “balanced”.
Law is impressed with the cost discipline Anglo has developed. “They came here five years ago, had a strategy and did not deviate from it,” he said.
Over the past year, the company set itself a cost-saving target of $200-million. It overshot that to save $335-million, $217-million of which comes directly from operating efficiencies. This helped the company cap a year that Trahar described as being of “considerable political and economic uncertainty” with a $1,5-billion profit, derived from headline earnings a share of $0,120, down 4% from last year’s $0,125.
The year’s final dividend rose 6% from $0,51 to $0,54. With a cost base of $14-billion, Law said Anglo had a larger scope to cut costs, but was behind Rio and Billiton in this area.
The Anglo results also revealed the benefits of diversity. Last year, diamonds were the star performer, contributing $386-million to headline earnings of $1,7-billion, at 23% the single largest contribution.
The “girl’s best friend” takes over from paper and packaging and platinum as respective leading contributors to headline earnings.
This may partly explain why Trahar dismissed, with slight irritation, speculation that he is in talks with the Oppenheimer family to sell Anglo’s 45% stake in diamond miner De Beers. He pointed out that with an investment history stretching back 75 years and having last increased its holding in June 2001, the monolith had no intention of letting go of this cash cow.
Platinum’s contribution to headline earnings slumped from $802-million to $433-million. Anglo sang from the same sheet as all mining companies when it lamented the adverse effect of the rand and Australian dollar strength. Currency strength wiped $578-million off profits. This was partially offset by rising commodity prices, which brought in $400-million yielding a net loss of $178-million from currency.
A problem area has been the world’s largest platinum producer, Anglo Platinum, which one analyst described as “a headache”.
Last year the subsidiary took on a new CEO, Ralph Harvenstein, and a review of projects. In its recent results, it showed a 63% fall in headline earnings per share, despite meeting its production target of 2,3-million ounces.
The problems at Anglo Platinum are seen to lie in its inability to contain costs. “They have over-promised and under-delivered,” Law said. Mine costs rose 18,3% at a time when peers Impala and Lonmin are operating on single-digit cost increases.
Law attributed this to “complacency that comes from a period when Anglo Platinum had huge reserves and high margins”. He was encouraged by Anglo’s decision to increase its stake in its platinum subsidiary to roughly three-quarters and second people to back up Harvenstein. But many are unimpressed with Anglo’s ambition to keep this year’s cost increases at Anglo Platinum in line with South Africa’s inflation of 4%. “It is another case of over-promise,” Law remarked.
Anglo Platinum now plans a R4-billion rights issue. But a Merrill Lynch investment report suggests the platinum producer will need further borrowings if the platinum group of metals basket price does not improve sufficiently to help fund expansion. Merrill Lynch has a sell recommendation on the share.
The group has also just completed a merger between subsidiary AngloGold and Ghana’s Ashanti Goldfields. The latter has in the pipeline the $1-billion Obuasi project. If the project goes ahead Anglo will house the world’s largest gold producer.
The year also saw the group increase its stake in Kumba Resources to 66,6% following a drawn out Competition Tribunal hearing. It is now undertaking an audacious bid to become a leading iron producer, currently considering projects that will increase steel production by 40-million tons a year.
Trahar confirmed that the group was looking to China for opportunities. An office has already been established in Beijing and Trahar will spend March there to explore opportunities. China is a significant buyer of a range of metals, but Anglo also wants to extract for gain. Trahar also listed India as a targeted destination for opportunities.
Law described entry to China as being late compared with its peers, but noted that since China “is a 20 or 30 year story” Anglo would benefit from future growth peaks.
However, he said he could not see how the group would break into India, noting that “Rio has been trying there for the past 10 years”.
India is rich in zinc, lead, aluminum and iron ore, but bureaucracy and a privatisation programme that hand mineral rights to local companies are discouraging barriers.
Anglo will continue to engage the South African government on levying mining royalties on profits, not revenues. Anglo executive Michael Spicer argued that the current proposal would ultimately make the industry “smaller than it would otherwise have been” by strangling marginal mines.
Minister of Finance Trevor Manuel is on record as saying the charge is a “rent, not a tax”. Last year, South Africa contributed 34% to Anglo’s headline earnings, down from 40% because of the rand’s strength.