Mike Schroder, head of research, Old Mutual Asset Manangement
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» Can Anglo rein in rivals?
» Anglo unveils far-reaching restructure

» JSE:ANGLO AMERICAN PLC:
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Tony Trahar’s end game
David McKay
Posted: Sun, 30 Oct 2005

[miningmx.com] -- ANGLO American CEO, Tony Trahar, has called the company’s restructuring plans “a road map for the future”. That may be, but analysts and fund managers have been puzzling, first, why and then whether unveiling only a “work-in-progress” strategic paper makes good sense. Or if, in fact, it’s news at all.

Trahar says that he doesn’t expect “universal acclaim” from shareholders, but he thinks most will be impressed. The reality is that while many like the prospect of a proposed $1bn capital redeployment – an unconnected element that sweetens the restructuring proposal – some of the measures unveiled by Anglo merely confirm the group’s long-standing strategy and, in the opinion of some, stop short of a better one.

“The proposed restructuring is the most radical development within Anglo since its creation as a plc company and its primary listing in London in 1999. Having said that, the proposals are not as far-reaching as the market had hoped,” says Nick Hatch, an analyst at Investec Securities in London.

On the face of it, the restructuring is based on the “less is more” premise. In essence, Anglo is proposing divesting itself of its 79% stake in Highveld Steel & Vanadium (worth around $683m), the potential separate listing or unbundling of its shares in Mondi and perhaps the sale of its 53% stake in Tongaat-Hulett (worth about $623m).

But it has stopped short of selling Tarmac, a business that deals in products such as industrial aggregates, declaring instead that it will be streamlined. That’s a far cry from market expectations, which thought Anglo would divide along mining and non-mining assets or that it would produce a shear line between its higher risk South African assets and its international ones.

Investors have in general not been surprised to learn that Anglo is reconsidering its attitude to Tongaat-Hulett. Similarly, the proposed sale of Highveld is equally unsurprising, since there’s evidence concerning Anglo’s disaffection for the ferrometals business dating from 2002, when it sold Columbus Stainless to Acinerox, and later Samancor Chrome.
There’s scope for Anglo to appear on the radar screen of any predators
The outcome is an entirely predictable focus on its core business of mining diamonds, platinum and base metals as well as the bulk materials iron ore and coal without completely abandoning the contra-cyclical assets it has used to establish a niche among conservative investors.

From a historic perspective, Anglo has been untangling its mining and non-mining assets since listing on the London Stock Exchange in May 1999. To that end it’s worth remembering how diversified the group was at that time.

Anglo’s industrial investments alone included shares in unlisted businesses Scaw, Boart, Samcor and Mondi, as well as interests in listed firms Highveld, AECI, McCarthy, LTA, Samancor and Tongaat. It also had shares in Rennies, Ventron, Daewoo, Del Monte and Amfarms. Then there was its financial services holdings FNB/Southern Life (later FirstRand), and shares in Amzim, SA Breweries and Minorco.

In this light it’s quite easy to believe Trahar when he says: “The restructuring is an evolution of a strategy dating from 1999.” In fact, compared to an estimated $9bn of divestments over the past six years (averaging $1,5bn/year), the further reshaping of $1,3bn (representing Anglo’s economic interests in Highveld and Tongaat-Hulett, but excluding the potential dilution it may experience in AngloGold Ashanti) over an unspecified timescale is noteworthy but not breathtaking.
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Imagining for a second that Anglo rids itself of its non-core industrial interests and externalises Mondi, thereby becoming definitively mining in scope, it does raise the prospect that it could become vulnerable.

Analysts have considered that outcome. “For the first time in living memory there’s scope for Anglo to appear on the radar screen of any predators,” says David Pleming, a mining analyst at Nedcor Securities. Having said that, Pleming doesn’t necessarily believe a takeover of Anglo is on the cards.

Investec’s Hatch agrees: “We don’t believe that any of Anglo’s peers have a desire to radically increase their exposure to deep-level mining in South Africa.” (Interestingly, the potential disposal of Mondi would actually increase the residual share of earnings coming from South Africa.)

Suggestions that Anglo could saddle up with Xstrata also seem unfounded. The two firms wouldn’t combine well. Compared to Anglo’s assets, Xstrata has smaller, shorter life mines, says Mike Schroder, head of research at Old Mutual Asset Management.

So in the absence of shocking new details, why did Anglo bother with the fanfare of an announcement and what is its grand plan?

More details may emerge later, but it now looks as if Anglo has buckled under market pressure to “do something” – make a statement to counter its growing reputation as the 'also ran' compared to its peers BHP Billiton and Rio Tinto. Instead, the announcement looks half-baked and certainly expensive, having seen its share price gain 47% since May – the period in which much of this information was “swirling about the market,” as Trahar terms it.

Even its capital management plan – an intention to return up to $1bn to shareholders either through a share buyback or special dividend – pales in significance against BHP Billiton’s $2bn share buyback completed in its 2005 financial year and Rio Tinto’s $1,5bn capital programme. “It only serves to confirm that Anglo is less cash generative than its peers,” says John Clemmow, an analyst at Investec.

However, it needs to be said that concerns about the heft of the capital management is an international viewpoint. In fact, Anglo’s restructuring plan has its supporters, particularly in South Africa, who have a different perspective. After all, Anglo is the country's largest listed company.

South African investors, who can’t invest in blue chips in London, welcome the capital repayment. “$1bn is nothing to be sneezed at,” says Matt Brenzel, fund manager at African Harvest in Cape Town. “The capital return wasn’t known and we think it’s brilliant.”

“Anglo isn’t growing for growth’s sakes and the capital return to shareholders is very exciting,” says Schroder. Contrary to many other voices, South Africa’s largest fund believes that Anglo’s plans surpass expectations.

Intriguing, however, in Anglo’s restructuring notice is acknowledgment that its stranglehold over AngloGold Ashanti, a 51% stake valued at $5,8bn, must end. One possibility is that Anglo will probably allow itself to be diluted if its gold unit sets about an acquisition.

A number of names have been associated with AngloGold Ashanti in this regard, most notably North American gold firms such as Placer Dome, Barrick Gold or Newmont Mining, with whom the South Africans could merge or acquire. But analysts don’t think that AngloGold Ashanti is either a takeover target or that it’s about to buy something.

The company’s gold hedge book and Anglo’s unwillingness to take gold paper (particularly so, as it’s trying to exit the gold business) would negate any attempt to buy AngloGold Ashanti. Cynics say that Anglo is keen to promote the notion of some deal because it removes the possibility of an overhang in AngloGold Ashanti shares.

“Realistically, if you’re sitting outside of South Africa there’s nothing AngloGold has that makes it terribly exciting,” says Georges Lequime, an analyst at RBC Capital Markets. Given that Anglo has “turned every rock” on AngloGold Ashanti and found no further value would suggest that other companies may do the same exercise with the same results, Lequime says.

Bobby Godsell, AngloGold Ashanti CEO, isn’t saying either way. “We’re always working hard looking at possible deals. When we get one, we’ll announce it.” Meanwhile, Trahar appears to be under no delusions about how the market will view the restructuring roadmap. “In my time I’ve learned that one or other shareholder always has a criticism. You never get universal acclaim.”

The final arbiter – the market – appears suitably impressed by Anglo’s intentions, having gained 5% on the day of the announcement (26 October) in London and pretty much holding that level at the time of writing.

Certainly, Anglo’s interest in establishing a much tighter focus on businesses that produce mined commodities is a promising gloss on the market.

In fact, in focusing on its core mining companies has Anglo acknowledged that the commodity cycle – about which it’s been the least fulsome in its enthusiasm – is to last longer than it first imagined? Trahar comments that the group doesn't react to short-term pressures. That may be true but surely shareholders are buy the stock for its short to medium term attractiveness and not just because management wants to forge a company for the longer term?

One unanswerable question is whether the market is now at a peak and will Anglo come to prize more profoundly the contra-cyclical assets it owns?

In retrospect, the view that Anglo has taken a long look at itself since listing in London in 1999 and decided that it hasn’t performed as it might isn’t as compelling. Certainly, Anglo has underperformed BHP Billiton – but then again, which mining company hasn’t? Over three years, Anglo has underperformed Rio Tinto, but over five years it hasn’t.

“This century we have outperformed Billiton and Rio Tinto,” says Trahar. “Anyway, we’re not in the same business as them and don’t have the same exposure. In many respects we’re contra-cyclical.

“We have a mix of investors who like the contra-cyclical part of our business, where we’re much less volatile and highly cash generative across the cycle. But of course we will always seek to outperform our rivals.”