No one could have imagined that the commodities crunch could have brought a mining colossus such as Anglo American to its knees.
But just last week the company announced it will shrink its asset portfolio to a mere shadow of its former self in the hope of surviving to see its 100th anniversary next year.The company that at one time dominated the JSE has, in recent years, slid down to 15th largest by market capitalisation.
Anglo says it is in talks with potential buyers for its now non-core assets – many of them South African – but it’s hard to imagine who the takers will be as Anglo’s move shows commodity prices are not expected to recover soon. Uncertainty over how successful the assets can be during the current economic downturn was a key reason for three ratings agencies to cut Anglo’s investment rating to junk status last week.
Anglo’s chief executive, Mark Cutifani, says the company will keep some of its assets in diamonds, copper and platinum, which have a global competitive advantage and have better long-term potential. Anglo hopes to have less than $10-billion net debt by the end of the year.
Being tossed on the reject heap are some nickel, niobium and phosphates assets. In South Africa, several platinum and coal assets are on the hook. Also included is Kumba Iron Ore, Anglo’s former cash cow, which was so profitable in 2011 that its employee share scheme paid out half a million rands to each employee.
Cutifani says the company is making progress in South Africa and Australia with some of its coal and platinum assets.
Sibanye Gold’s R4.5-billion bid for Anglo Platinum’s Rustenburg assets is still subject to regulatory approval.
Gideon du Plessis, general secretary of trade union Solidarity, says he understands that six parties are interested in acquiring Anglo’s coal assets. Anglo says the sale of Eskom-linked mines is confidential and the names of the bidders cannot be disclosed at this stage.
“It is also premature to advise on buyers for assets that we announced as early as Tuesday [February 16],” it says.
“Fundamentally, Anglo has no bad assets,” says Peter Major, a mining analyst at Cadiz Corporate Solutions. “But this is such a bad environment for mining in South Africa that it has everything to do with the neighbourhood. Local buyers are all they’ve got.
“There are no foreign buyers lurking after they have seen the Anglos and the Glencores of the world struggle here. And these are two tough, experienced operators having to cut and run. It will be local buyers.”
Mamokgethi Molopyane, a mining and labour analyst at Creative Voodoo Consulting, says it is not surprising that Anglo decided to unbundle some of its assets.
“However, the timing is very peculiar,” she says. “Even in the context of the South African operations, it is difficult to tell who would be buying those assets.”
Molopyane says some companies could be interested, but it comes down to being able to understand how South African labour and policy works. It is possible the likes of X2 Resources, headed by former Xstrata executive Mick Davis, could buy the iron ore assets, Molopyane says.
“Davis has working knowledge of South Africa and understands labour dynamics and policy dynamics. I do think Neil Froneman at Sibanye Gold is also a potential buyer. He has been saying he wants to diversify. So Kumba he might want to buy, provided he has enough cash.”
The coal assets will also be interesting. “If you look at the narrative coming from the ANC and government, they are looking for significant black players,” says Molopyane.
“And the coal assets have a significant contributory role to play in supplying to Eskom. So, if you are a black player in the industry, now is the time to invest.”
In a statement following Anglo’s restructuring announcement last week, Mineral Resources Minister Mosebenzi Zwane said he views the changes in the mining sector as an opportunity for new black economic empowerment champions to participate in the industry.
Du Plessis says Solidarity is in favour of empowerment. “We hope we can fast-track empowerment through these transactions so we can start to look at other things.”
But, Molopyane says, “within the South African companies, I cannot see anybody having raised enough capital to buy into this … It will be interesting to see which parties might come together and form something and buy these assets because of the strategic role of coal in economy.”
Anglo American’s chief executive, Mark Cutifani. (Daniel Acker, Bloomberg)
The government’s ability to buy in will also be limited. “If you look at what the finance minister has said, we need to manage the fiscus carefully. There is no extra money to spend on anything else than what it is meant for,” Molopyane says.
Competition authorities this week approved the merger between Tegeta Exploration and Resources – a subsidiary of Oakbay Investments, which is linked to the politically connected Gupta family – and Optimum Coal. But Oakbay is unlikely to have the appetite for another deal, Molopyane says. “I don’t see them expanding beyond that.”
The Independent reported last week that an Oakbay Investments spokesperson said it was not in talks with Anglo.
“Anglo have made a promise they will only sell to reputable institutions,” says Solidarity’s Du Plessis. “These are very good assets and they worked hard to set a high standard. They will not sell to someone who can’t maintain the same standards. We would prefer a Sibanye Gold type of company. They will soon be the leading mining house in the country. Hopefully Sibanye has an appetite for more Anglo assets … We would definitely object if empowerment is linked to any politicians, especially if it is the Guptas – they are not mining specialists.”
William Mabapa, deputy general secretary of the National Union of Mineworkers (NUM) and the union’s chief negotiator at Anglo, says the union can’t to be too selective about potential buyers of Anglo’s assets, and if the union attempted to block a sale, the company could decide to issue a notice to retrench workers.
“We will look at the credentials of a company that wants to buy. If their credentials and profile is that they can afford to run the mine, I don’t think we have that much luxury to dictate who will buy and not buy,” Mabapa says. “Those are business transactions.”
Anglo says it will consider the commercial value of offers, the track record of bidders and the ability of bidders to deliver on social and labour plan commitments, among other factors.
In the five years ended December 2014, Anglo spent a cumulative R3.2-billion on the development of local capacity, infrastructure for healthcare, education, housing and sanitation. Its enterprise initiative, Zimele, has been running for 26 years and, in 2014 alone, provided R436-million in funding to 270 businesses employing more than 8 000 people.
Anglo says the restructuring will affect the size of the organisation and therefore the scale of how it plays a role in the world around it.
“This does not lessen our commitment to being a responsible corporate citizen, but it does create challenges for how much we are able to do,” the company says.
Anglo’s restructuring marks the end of an era, Du Plessis says. “But we can expect that all of the industry will continue shrinking and we will see more disinvestment. All we can do is to try to shrink at a slower pace.”
Anglo grew to such an extent that, in its different forms, at one point it accounted for 60% of the JSE.
At that time, it was hard to work out how far its reach went, says David Shapiro of Sasfin. “In the Nineties, the South African economy began to open up and Anglo began its transition into a global mining company … Once overseas, I don’t think they were able to adapt from a very cosy protected environment to an international environment where 25-year-old snotty analysts are suddenly challenging management decisions,” Shapiro says.
“Anglo used to be the stalwart of any portfolio. A lot of institutions still have holdings. I don’t know where the value is. A lot of us bought believing that it would turn. It’s hard for us to get commodities out of our heads,” he says.
Major of Cadiz Corporate Solutions describes the restructuring as monumental. “This company is coming up on its 100-year anniversary next year. Nobody could have foreseen they would have been in half this much trouble.”
He described the restructuring as akin to a house on fire. “The whole house is burning. They are just going through the rooms and saving the best furniture.”
But, he says, “if Anglo is to survive, they almost have to leave South Africa. The environment is so toxic here for them.”
But a changing local environment and management decisions made before Cutifani’s arrival have been the main contributors to Anglo’s current problems, he says. “Under former chief executive Cynthia Caroll, the Anglo American board and chairman’s decision to invest in expansion in iron-ore mining in South Africa and especially a brand-new mine and harbour in Brazil at the top of the market has proved catastrophic due to high entry costs, huge cost overruns and numerous delays.”
Ernest Oppenheimer, who in the 1930s, 1940s and 1950s built Anglo up to be nearly the largest mining company in the world, didn’t chase stuff, says Major.
“He didn’t embark on vainglorious projects without a very conservative and sound basis. And, when he did do a big project, it was seldom at the top of [the] cycle.”
From a share price of R295 in 2014, Anglo’s share price dipped to a low of R53 at the beginning of this year, and recovered to about R100 this week. Shapiro says he doesn’t expect it to get any better. The fall in Anglo is symptomatic of what happening in South Africa, he says. “We have to readjust ourselves for this. We can’t sit and wait. Anglo isn’t. We have to adjust to these worst-case scenarios.”
Mabapa of the NUM says: “It is our understanding that the company [Anglo] is not doing something because they want to do it, [but] because of economic pressure.”
But Solidarity’s Du Plessis expressed concern that Anglo might be hiding behind financial and economic excuses to disinvest from the country because of uncertainty over the regulatory framework, labour relations and political involvement in Eskom coal mines.
“I think those are the things that play a role. It’s a pity Mark Cutifani isn’t more vocal about this, because it can only do the country good going forward.”