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Can Carroll grasp the nettle?
Vic de Klerk
Posted: Wed, 01 Nov 2006
[miningmx.com] -- ALCAN PRESIDENT AND CEO Dick Evans probably felt a few pangs of jealousy last week at seeing his senior assistant Cynthia Carroll being appointed the new CEO of Anglo American. It looks as if her chair at Anglo is considerably larger and perhaps even softer than his own as the CEO of one of the world’s large specialist aluminium producers.
Alcan, with a market capitalisation of $16bn, has struggled somewhat over the past two years. Alcan’s price, which has fallen from $48 to $43/share over the period, also shows that the group hasn’t shared much in the tremendous revival in world aluminium demand.
In fact, the fall in turnover from $24,9bn for the 2004 financial year to $20,32bn in 2005, and profit that fell by more than 50% from $258m to $129m between 2004 and 2005, perhaps explains why the group’s price was as low as $30/share in September 2005.
The graph (with October 2004 as the base) shows that Anglo’s price in US dollars doubled over the past two years while that of Alcan in fact fell slightly.
The position of CEO at Anglo – with its $67bn market capitalisation and a wide range of resources assets spread worldwide – certainly looks more attractive than Alcan’s. There are so many more opportunities at Anglo to show your mettle as a CEO.
Anglo’s turnover for 2005 was around $34bn, which was slightly more than Alcan’s. However, it’s especially its $3,7bn profit that totally overshadows Alcan’s mere $129m.
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Analysts and international investors put much emphasis on the return on capital employed, but especially on the return on shareholders’ equity as a yardstick. In fact, that’s probably the most important one for measuring management’s efficiency.
In its latest financial year, Alcan achieved a 6,15% return on shareholders’ equity. The management of Anglo, with its 13,5% return on own capital, more than showed its worth.
Admittedly, Alcan’s latest results show a considerable improvement and it looks as if the group is recovering a bit its problems in 2005. However, its long-term objective of earning a higher return on shareholders’ equity than the cost of capital is somewhat meaner than Anglo’s shareholders are accustomed to.
Carroll will quickly have to get used to the challenges of a return of 15% or more on shareholders’ equity that the world’s leading miners like to be measured by. And it will also not just be an opportunity of picking low-hanging fruit.
Already last year Anglo’s board announced significant structural changes to its business model, the proposed sale of AngloGold Ashanti probably the major event.
It’s almost impossible to think of Anglo without gold, but AngloGold – with its extremely low return on capital as measured by the current market price – is a brake on the group’s overall return on capital and therefore has to go.
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The same applies to Mondi and Tongaat, Anglo’s massive local interests in forestry and pulp and sugar and property respectively.
Anglo is currently still earning 36% of its income in South Africa. After the planned sale of AngloGold, Mondi, Tongaat and also Highveld, the contribution by South Africa will fall from 36% of Anglo’s operating profit to quite a bit less than 20% – nearly all from Anglo Platinum.
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