SHARES in Anglo American have charged up an astonishing 250% since January assisted by the surprising recovery in metal prices and improved volumes in diamond production which saw its full-year results come in 15% to 20% better than some analysts’ expectations.
Whereas the group was bruised and broken a year ago, it is now floating on air; it’s balance sheet no longer over-stretched even though it has only sold $1.5bn worth of assets in niobium and phosphate mines.
The significance of this is there’s less pressure to sell off more assets unless CEO, Mark Cutifani, gets absolutely good value for them. Yet sell is what he wants to do, according to reports in the UK press.
So a question worth asking again is what’s the likely affect of the improved market on the restructuring of the South African assets – the iron ore (Kumba Resources) and coal mines – that Cutifani announced in December last year and which would leave behind a ‘new Anglo’ consisting of copper, platinum and diamond assets?
Bear in mind that with the sale of Australian coal mines Moranbah and Grosvenor imminent, there will be even less pressure on the balance sheet with net debt falling below $10bn. At the same time, however, the South African assets will comprise the majority of the remaining group.
The increasing likelihood now is that instead of an outright sale, which is proving hard to do given the complex relationship with Eskom and the difficulties of selling black economic empowerment shares, Anglo will opt for a demerger.
This is exactly what the Public Investment Corporation (PIC), Anglo’s largest shareholder with a 14.5% stake would like Anglo to do, according to a recent report by UBS analyst, Kieran Daly. “It [PIC] has a stated preference for a demerger over piecemeal asset sales in South Africa,” said Daly.
According to Daly, there is potential for a demerger of Anglo’s South African assets to afford Anglo a 20% uplift in share price notwithstanding the recent share price gains. This uplift would be in line with how its peers in the platinum, diamond and copper sectors have performed.
Demergers have generally worked well on the JSE. One only has to look at the performance of Sibanye Gold, formed from the demerger of Gold Fields’ Kloof, Driefontein and Beatrix gold mines, as well as South32 which comprises the non-core assets of BHP Billiton, all of them in the southern hemisphere.
The demerged Anglo assets may not perform quite as well, however, says Daly.
“While we note the relative out-performance of other recent demergers, in our opinion the scope for similar value uplift from Anglo SA is, to some extent, limited given visibility into Kumba Iron Ore is already high [as it is separately listed] and the South African coal assets have been well managed,” said Daly.
He also speculates on how such a demerger would be structured.
The first option would be to put the South African assets – 70% of Kumba Iron Ore, 40% of Samancor (manganese assets held in joint venture with South32) and the thermal coal mines – into a new Anglo SA vehicle which is listed in London and Johannesburg.
The second is for Kumba, which is already listed, to buy the coal mines and Samancor from Anglo which would then allow Anglo to unbundle its Kumba Iron Ore shares to Anglo shareholders.
One of the other questions about demerging Anglo is the level of debt it would assume. Government does not favour local assets to float with massive debt; this was one of the objections to the demerger of AngloGold’s South African assets.
With Anglo’s South African mines, however, net debt would be between $900m to $1bn regardless of whether Kumba bought the assets or Anglo unbundled its shares directly, says Daly.
