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So far Anglo is right in saying no to BHP, but executives have yet to offer shareholders a compelling vision of how an independent company would do better, writes Javier Blas.
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Back in October, the boss of Anglo American took some of the company’s top shareholders to dinner. Under pressure to turn around performance, Duncan Wanblad promised there were no "sacred cows" in the portfolio. Now that he’s facing an activist investor, plus a takeover attempt, it’s time to make good on the promise.
Wanblad, who became chief executive officer two years ago, has taken the right steps: Last year, he launched a companywide asset review, typically a prelude for divestments and project cancellations. For a moment, it seemed like he would make good on his promise. Yet shareholders remain in the dark about his concrete plans.
Anglo American, established in 1917 by mining tycoon Ernest Oppenheimer, has always been a mismatch of assets glued together by a century-old brand.
Admittedly, the company is today much simpler than the higgledy-piggledy firm of the 1980s. Then, coal, copper and platinum units mixed with subsidiaries involved in pineapple canning, beer brewing and hotels. Nowadays, the London-listed company is all about mining, with five big businesses — copper, iron ore, steelmaking coal, platinum and diamonds — as well as a wannabe expansion area: fertiliser.
Still, it remains more complex than its main rivals, including industry leader BHP, which earlier this month announced a takeover attempt for £31 billion.
Anglo American quickly — and rightly — rejected the offer, saying undervalues the company. BHP has since made since a second attempt, rising its offer by 15% — only to see it quickly rejected by Anglo American.
So far the miner is right in saying no, but executives have yet to offer shareholders a compelling vision of how an independent Anglo American would do better than the deal BHP proposes.
For the last decade or so, Anglo American has traded at a discount to its peers, so business as usual isn’t an option. Wanblad has been waiting to see the latest offer from BHP. The approach made sense — if he’s ready to simplify the company and reduce spending significantly.
That’s a big if. Now Anglo American has promised a formal update to investors on May 14, before the market opens in London.
The most obvious — and easy — move is to sell De Beers, the iconic diamond miner in which Anglo American owns an 85% stake. The disposal would make headlines, but not much money, however. Last year, De Beers accounted for just 1% of Anglo American’s earnings before interest, taxes and depreciation (Ebitda) of about $10 billion. De Beers may sound as one of the company’s sacred cows — and thus it may be tempting to think that selling would be bold and would resolve Anglo American’s problems. Neither is true.
The real sacred cow is the Woodsmith mine, a $9 billion project in northern England to mine polyhalite, a mineral that contains potassium, sulfur, magnesium and other nutrients that make it a good fertiliser.
It’s a gigantic project, including a 37-kilometer tunnel to transport polyhalite from the mine to a port.
The construction of Woodsmith — a pet project of former CEO Mark Cutifani — is one of the reasons why Anglo American is putting out so much money for a company of its size. The firm is targeting capital expenditure of about $5.7 billion across the next two years.
If nothing changes, Anglo American's spending over the five-year period to 2025 would top $29 billion, on a par with the 2010-2014 period when its capex budget also exploded.
Wanblad needs to stop the Woodsmith money bleed - and a partner to shoulder the financial cost of the mine, which is running at $1 billion a year, and to provide shareholders visibility about its commerciality. Anglo American knows how to dig for minerals, but it has little to no experience about how to create a market for polyhalite, an ore that farmers aren’t today using as fertiliser at a large scale.
If Anglo American is unable to find a partner willing to buy into the project, it should cut its losses and stop building the mine for now. Painful as it might sound, it still would be better to put the site into care and maintenance, taking a non-cash writedown, than continuing to pour good money after bad, potentially locking in dismal returns for decades to come.
Ideally, Anglo American would have preferred to look for a partner when it had something more to show at its fertiliser mine – and therefore extract a higher value. First production isn’t expected until 2027 and at a much lower volume than initially mooted.
But the miner doesn’t have the luxury of time anymore. Woodsmith needs to be solved now, not a couple of years down the line when the project is more advanced. Even if Wanblad solves the fertiliser problem, Anglo American would remain a relatively complex operation.
Its platinum unit in South Africa, of which it controls 78%, is struggling.
Yet its cash flow is needed to invest in other areas, including copper. Iron ore and steelmaking coal are very profitable and worth retaining.By tackling Woodsmith and De Beers, Wanblad would put Anglo American onto a firmer path. The problems won’t be over, but at least the miner could show its investors a distinctive future, independently of BHP. If the latter still wants to attempt a takeover, it will have to pay a much higher price.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He is coauthor of The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.
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