Cutifani must strike while the iron is hot

Anglo American has had its fair share of problems, many of them in South Africa.

The most recent was the undisclosed settlement involving 23 miners suffering from silicosis, most of them from the President Steyn mine in the Free State.

In the first half of the year, the company also had to contend with talk of increased mining taxation, debate about the nationalisation of the mines, and labour unrest in the platinum sector, in particular, which is already struggling with very poor margins as a result of low prices.

All of this would not have inspired investors or helped performance.

The government objected in particular to the loss of jobs that would result from the closure of some shafts by Anglo Platinum (Amplats).

Strain evident
The strain between the mining sector and the government — and Anglo American and Minister of Mineral Resources Susan Shabangu in particular — was evident at February's global mining indaba in Cape Town.

As the Mail & Guardian was going to print, strikes over efforts by Amplats to cut 4 800 jobs (reduced from initial plans to lay off 14 000 miners) continued at the Thembelani mine near Rustenburg.

Then there is the general decline in commodity prices, offset somewhat locally by the weak rand and delays at some of Amplats's other operations, including the Minas-Rio iron-ore project.

Peter Major of Cadiz Corporate Solutions summed up the view of many in the market: "I am not really interested in what Mark Cutifani said, because he virtually always says the right things. But we have heard lots of CEOs [chief executives] presenting their plans for change. As a fund manager I just want to see him successfully implement his plan. Then we all benefit."

Another fund manager agreed, saying Cutifani talks a good game but only time will tell whether he and his team can cut costs and make the company a leaner machine.

The restrained response to Cuti­fani's new plan is not without reason. In the past 10 years, Anglo has had three chief executives, all with different strategies.

Restructuring local businesses
Tony Trahar restructured and disposed of some local businesses in 2000.

Unfortunately, this was at a time when other resource companies were buying commodities to serve growing infrastructure demand.

Then Caroll came in at the top of the commodities boom and started trying to catch up by making a number of acquisitions.

But the prices were at a premium and, although some may turn out to be beneficial in the long term, what she paid for them alarmed both the market and shareholders, who were not seeing returns.

In fact, between 2007 and 2012, Anglo American's total capital employed had reached $55-billion, while return on capital had dropped from 37% to 13%.

Enter Cutifani. At the July presentation of the company's annual results, he said capital spending had to be reduced and that, over the past eight quarters, only 11% of Anglo's business units had managed to achieve their budgets, a performance he described as "unacceptably poor".

In the honeymoon phase
Major said Cutifani is fortunately still in the honeymoon phase.

"The first year is the honeymoon for shareholders — in fact, more like the first three to six months — and then shareholders want to start seeing returns."

Looking at the performance of some of the acquisitions during Caroll's tenure, such as Minas-Rio, which cost $5.5-billion, and the Alaskan copper, gold and molybdenum project, which will see Anglo American write off $300-million after selling it back to Northern Dynasty, Cutifani said Anglo had taken action to address shareholder concerns about its holdings in South Africa, not delivering on operating performances and the allocation of capital, and was addressing them.

"They [Anglo] don't have bad assets; they have a nice spread," said Major. "What they need to do now is run the assets they have and not buy anything new for a while."

Albert Minassian, a metals and mining analyst for Investec, said in a note that the company was generally pleased with Anglo's first-half results, which were better than expected.

He said they were predominately a result of a "modest surprise in platinum, and to a lesser extent diamonds, and coking coal" in the first half of the year.

Questionable
He said, although "the purchase and development of Minas-Rio and the long-term planning of the platinum business are questionable", Investec was against the sale of Minas-Rio.

"If Minas is successfully delivered, it would enhance Anglo's growth," he said.

Minassian said if Minas delivers during its revised time, and if 100% of it is retained, Anglo American stands a chance to outperform BHP Billiton on an aggregate volume basis from 2015 onwards.

"Comparing Anglo to BHP on an output weighted price base shows that at least part of BHP's outperformance had to do with the fact that its asset portfolio faced better prices than Anglo's."

Analysts are concerned about an oversupply of iron ore, to which Anglo American has a lot of exposure through companies such as South Africa's Kumba Iron Ore, which contributes nearly half of Anglo American's profits, and copper.

In its half-year statement, it was said that Kumba contributed an estimated $579-million to Anglo American's half-year earnings.

Problems at Kumba
Kumba is not without its problems, however. Costs at its flagship, Sishen Iron Ore, continue to move in the wrong direction, partly because of its mining of waste, a necessary but dilatory step Kumba says it must do in order to build long-term flexibility into the mine.

Minassian said Investec is upbeat about platinum, saying "prices will recover over time", but an oversupply of iron ore, uncertainty about Chinese demand for commodities and possible interference by the South African government limiting "miners' ability to control their costs and scope for independent decision-making could have a big adverse affect on investor confidence".

He was referring to government intervention over job losses at Amplats, the downsizing of which was intended to save the company money.

Cutifani said at the mining lekgotla in August, in his capacity as Chamber of Mines president, that there had been "internal engagement between government and mining".

He said that the ongoing tension between the government and the mining sector, combined with a 10% drop in production, has led to a 30% destruction of value between 2007 and January 2013.