Cutifani calls Anglo’s best payout in 10 years a culmination of work

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Mark Cutifani, CEO, Anglo American

ANGLO American halved debt and paid a handsome second half dividend for its 2017 financial year – its largest in 10 years – in a full-year performance that CEO, Mark Cutifani, acknowledged was the culmination of his work at the UK-listed group.

“We’ve done what we said we would do. Anglo American is a fundamentally different business: it is more resilient, it is more competitive, it is delivering solid returns. We see a lot more opportunities to improve,” he said in a media conference call.

The stand-out feature of the numbers was the free cash flow which, at $4.9bn, represented a 93% increase year-on-year, enough to reduce debt $4bn to $4.5bn or by 47%. Net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) stood at 0.5x as of December 31. Steven Pearce, CFO of Anglo, said the intention was to keep this ratio at no more than 1.1x through the commodity cycle.

In terms of shareholder rewards, full-year earnings per share came in at $2.57 compared to $1.72/share in the 2016 financial year. Owing to the group’s improved balance sheet, and amid signs that higher commodity prices are here to stay for the foreseeable future, Anglo paid a 54 cents/share final dividend which was equal to Anglo’s stated payout ratio of 40% of second half underlying earnings of $8.8bn. The total dividend was $1.02/share.

Goldman Sachs said Anglo’s results, including the dividend, were largely in-line with expectations, but it added that net debt came in $1bn lower than forecast owing to “… lower cash tax (carried forward losses in Australia) and better working capital management”. Shares in Anglo American traded 2.4% lower in the first hour of trade on the Johannesburg Stock Exchange.

“We have got 40% fewer assets but we are producing 9% more product. Since 2013, our productivity has improved 80% and we have 26% lower unit costs (year-on-year),” said Cutifani. In terms of contribution to EBITDA, however, the health of the commodity market was clearly a major factor, as it has been for all diversified mining firms.

Improved commodity prices contributed $2.4bn to underlying EBITDA with the firm’s bulk minerals (iron ore, manganese and coal) contributing the greatest. The improvement in unit costs and production contributed a further $1.1bn of underlying EBITDA.

Productivity is measured on a per person metric which showed a 28% improvement. “We have got 40% fewer assets but we are producing 9% more product,” said Cutifani. Since Anglo’s 2013 financial year – which is when Cutifani was appointed CEO of the group, productivity has increased by some 80%.

INFLATION

Pearce said Anglo would continue to address its net debt. “We have tried to strike a balance between cash flow and the balance sheet, but we want to take it further,” he said. “It has all happened quite quickly (the reduction in net debt) … In terms of net debt, we expect further reductions if current prices hold. Prices are on average up a bit, so if they do hold, we could better this year,” he added.

One of the headwinds facing improved commodity prices is inflation, however. The higher cost of minerals feeds through to consumables such as explosives and steel. There had also been an improvement in host country currencies, especially in South Africa where the rand has firmed against the dollar by 18% since the beginning of 2017.

“Obviously, you’ve got inflation and currency feeding into these things,” said Pearce on the challenge of reducing net debt. “But so far commodity prices outweight the effects of currency and inflation. More than anything this drives us to improve the underlying business,” he said.

Said Cutifani: “My experience regarding currencies is that the best thing you can do is control your costs”. He also said Anglo would continue to work on productivity as well as improving prodution. The combination of these factors was behind a targeted underlying EBITDA run-rate improvement of between $3bn to $4bn by 2022.

Set against this target was the issue of how Anglo American intended to approach growth. “Growth has been a dirty word in the industry and so it should have been given some of the stupid things people did,” he said. “We’ve got some really significant, low capital cost, quick return payback growth opportunities.” These include de-bottlenecking at Moranbah, the metallurgical mine in Australia, and the addition of a ship for De Beers’ marine mining.

There was also the $5.6bn Quellaveco copper project in Peru which Anglo is considering syndicating out – introducing partners – to help it manage the capital cost. Cutifani said a decision on how to tackle the project would be made before the close of 2018 with the board set to consider the investment by mid-year. Cutifani alluded to the possibility of adding certain assets to the original project ambit. A feasibility study is currently underway.

The Minas Rio iron ore project in Brazil was also expected to hit its nameplate 26.5 million tonnes/year capacity by 2020 following the grant of another round of operating licenses.

“I think the thing about our industry is that you’ve got to understand your markets,” said Cutifani. “You should be producing to market demand, not over-producing. In our case, we match our production to demand and drive margins to deliver returns. We will keep our eye on all the moving parts to see we make the right decisions in a disciplined framework.”

SOUTH AFRICA

Cutifani acknowledged the appointment of Cyril Ramaphosa as South Africa’s new president in a similar vein to his rival Ivan Glasenberg, CEO of Glencore, yesterday. Ramaphosa has given several signals that he intends to be pro-business which represents an 180 degree change in approach to his predecessor, Jacob Zuma.

“Ramaphosa has reached out to the mining indsutry and said it is a key industry,” said Cutifani. “All the signs are good. The president understands our industry and he sees collaboration. We are pleased that government sees a revival in the industry,” he added.

1 COMMENT

  1. ( Note to Editor: Kindly please do not edit my comment. This comment is solely my views and NOT those of miningmx.com. I hereby hold miningmx.com harmless from any liability that might arise from the views that i have expressed)

    Dear Fellow Readers,

    The armchair critic has had a look at the FY17 results for AAPlc. But as previously indicated, I am going to assess progress of the last 4 yrs (2013 – 2017). This assessment takes a hard look at facts, and considers everything sparing no holy cows. For disclosure, I am a fan of the current CEO of AAPlc. He is a true mining gentleman & extremely articulate.

    The current asset portfolio, inclusive of projects, production figures are as follows as compared to FY12 (last year of previous CEO).

    DE BEERS : 30Mcts (FY12 : 27Mcts)
    PLATINUM : 2,98 Moz (FY12 : 2,41Moz)
    KUMBA : 45Mt ( FY12 : 43Mt)
    Met COAL : 14,6 Mt(FY12 :17,7Mt)
    COAL : 26Mt (FY12 : 68,5Mt)
    COPPER : 579 kt ( FY12 : 543kt)

    A passive reading to this, in isolation, will seem like a reasonable production report card on a constant portfolio basis. But that will be trivializing, and self-deluding, an important performance metric.

    A CEO of a diversified mining co. has many things to consider when charting a path forward. Unlike for a single commodity co., he/she has to make decisions about commodity categories (early cycle/bulks , mid-cycle (Base Metals; energy etc ) or late cycle ( PGMs; Diamonds etc) ) that will perform best and suitable scale/assets thereof. These decisions are informed by, bout not limited to, current asset & projects portfolio, economic/commodity cycle, Financial capabilities (Balance sheet & Cash Flow Generation potential) and inherent organizational capabilities. Matter of fact, the ex-CEO of AAPlc (Cynthia Carroll) got these wrong in a big way and was duly dismissed.

    Choosing commodities with the best medium to long-term prospects is the holy grail of being a diversified miner. Just to illustrate, Rio Tinto (erstwhile RTZ) was a mainly Zinc miner, but today it’s a FeOre and Cu behemoth. This was done by recycling capital into those commodities (Fe ore and Cu, that had better prospects.

    Other shareholder value creation factors are:

    Shareholder Value = F(Cash flows; Growth in these cash flows ; WACC ; risks to cash flows)

    Cash flows = f {Revenue (Prices & Volume); EBITDA margins; Re-investments ratios (SIB Capex); LoM}

    Others (WACC; risks to cash flows etc) are self explanatory to enlightened readers of miningmx.com. I am highlighting the theory to enable readers to follow my analysis , and maybe find logic and reason therein.

    PERFORMANCE REVIEW

    From the aforesaid, herewith, on a constant asset portfolio basis, is the production metrics on a per Cu-eq ( Rev/$3,61 (actual realised Cu in 2012)) production of AAplc :

    FY12 FY13 FY14 FY15 FY16 FY17

    Prod 9082 9159 8584 6374 6411 7270
    IC $57,2B $52,6B $41,8B $43,3B $37,3B $42,1B
    EBITDA $8,9B $9,6B $7,8B $4,9B $6,1B $8,8B
    ND $8,6B $10,7B $12,9B $12,9B $8,5B $4,5B
    CapEx $5,7B $6,3B $6B $4,2B $2,5B $2,2B
    Liquidity $18,6B $17B $15B $14,8B $15,8B $16,8B

    From the above, it is evident that AAplc was undergoing some turmoil and has as such undergone a severe shareholder value destructive catabolism. It has spend CapEx = ±$27B, with average D&A = ±$2,5B/yr then repaid debt = $4,9B, received asset sales proceeds = $3,94B thus Net CapEx spend $16B ONLY to reflect production CAGR = -4%.

    Much noise has been made that the debt was too much for this co. I beg to differ given the liquidity position it has maintained throughout, and quantum of debt repaid which could not be rescheduled. Liquidity has averaged >±$15B over the period. Therefore, ther was never a solvency or liquidity issue.

    I have adjusted my Invested Capital (IC) figure to remove arbitrary impairments by management. The cum.D&A = $15B, accounting for the decline in IC over the period. Therefore, management has squandered some $16B in 5 yrs because it does not reflect on Invested Capital. This is a capital misallocation, which is starting to reveal itself in the figures vs peers as per ROIC.

    ROIC = f (EBITDA margins ; Invested Capital turns )

    A measure, amongst many, which indicates the quality of mining assets is Invested Capital turns (Rev/Invested Capital). This is the trend of this measure for Rio Tinto:

    FY13 FY14 FY15 FY16 FY17
    IC turns: 0,66 0,62 0,52 0,51 0,58

    For AAplc, the metric reads as follows:

    FY13 FY14 FY15 FY16 FY17
    IC turns: 0,53 0,57 0,48 0,53 0,55

    A poor reading is any number below 50%. EBITDA margins for RIO ranged 35-44%, whilst AAplc’s ranged 21-40% for period FY12-FY17. Commodity prices do have a significant impact, and more specifically the company specific commodity production.

    For the period FY12-FY17, here is the avg yearly S&P GSCI (Commodity price index):

    FY12 FY13 FY14 FY15 FY16 FY17
    S&P GSCI: 640 630 640 550 350 437

    So AAplc management has invested, or sustained assets, in commodities that had poor prospects over the period. They did not recycle capital out timeously and have not been bold enough. The narrative which is being peddled of “small with quick payback projects” reflects lack of appreciation of mining economics. Consider , again RIO ‘s projects namely Silvergrass , Amrun & OT. Silvergrass supports was a CapEx=±US$400M , but with profound multi-year impact on Pilbara FeOre product quality. OT is a $5,3B mine for >500Kt/yr Cu production for >30 yrs. These type of projects move the needle NOT a R200M chrome recovery plant at the back of a PGM concentrator!

    So it’s all about project execution capabilities, that is doing fewer meaningful projects well NOT hundreds small ones! If Quellaveco is going to cost >$5B, then 300kt/yr Cu is just not sufficient to generated acceptable IRR. AAplc’s Cu prodn has suffered given grades challenges at Los Bronces. Therefore, if AAplc had the foresight to have held Michiquillay , with Capex= ±$2,5B for R+R = 1,1Bt Cu, maybe ±225kt/yr Cu , then it would have been approved to improve this part of its portfolio and lift prodn to >800kt/yr Cu. Recently, SCCO, which owns Toquepala & Buenavista and produces >900kt/yr Cu, has won the bidding with $400M for this orebody.

    For FY17 , RIO’s EBITDA was at FY13 levels of >$13B and the rest of peers ( Glencore etc) are at FY11/FY12 levels. For AAplc that will be EBITDA of $13B compared to actual FY17 of $8,8B. So clearly its lagging peers mainly because it has not upgraded its portfolio accordingly. Talking Tier1 is easy, BUT matching such with performance is what separates the “chaff from the wheat”.

    Comparing guidance to guidance, i.e., forecast to forecast, can be a valuable tool for assessing management’s ability to deliver on planned outcomes. AAplc management have talked about having removed some $4,9B in costs & volume cash leakages. As illustrated below, it’s all a mirage because on a constant asset portfolio basis (apples-to-apples), the cost base does not reflect this:

    FY12 OpEx = $18756M for 9082Mlbs-Cueq
    FY17 OpEx = $18027M for 7270Mlbs-Cueq

    So production is down 20% (on Cu equivalent basis) with Cost down 4% despite a mining costs deflation. If you include the $27B CapEx, the outcome looks even worse and diametrically removed from the management narrative. But where did management get its figures from one wonders? Wonder not, because here is the answer using AAP figures:

    FY12 FY13 FY14 FY15 FY16 FY17
    OpEx ($M) : $4909 $4640 $4868 $4182 $3862 $4212
    OpEx (R’B) : R27,8 R36,2 R44,3 R43,5 R46,4 R52,5

    This trend is similar, but worse, for KIO. Fellow readers any durable cost reduction or efficiency programme needs to reduce costs on an operating currency basis…NOT via Forex. And that’s were the supposed $4,9B can be gleaned. Furthermore, AAplc calculates their Cu-eq using analyst consensus price estimates , thus conflating facts to suit their narrative. As is evident using AAP, these “Costs and Volume benefits” require a degree of subjective judgement and are open to the narrative that management wishes to putforth.

    ANGLO STRATEGY

    A mining co. strategy resolves around which commodities a company chooses to produce and assets (type & scale) to support such metals production. As I will enunciate the current management at AAplc have made terrible choices in this regard. If AAplc had followed on their stated Investor Presentation (Dated 12/12/2013) “ Driving Value Understanding the Potential”.

    FY17 vs Fcast is as follows:

    DE BEERS: 30Mcts ( Fcast: 35Mcts)
    PLATINUM: 2,98 Moz (Fcast : 2,4Moz)
    Fe Ore (KIO & Minas Rio): 62Mt (Fcast : 74,5Mt)
    Met COAL: 14,6 Mt(Fcast : 25Mt)
    COAL: 26Mt (Fcast : 31Mt)
    COPPER: 579 kt ( Fcast : >700kt)

    Evidently, AAplc has underperformed its forecast and its production profile has shifted to commodities that did NOT fair well over the period FY13-FY17. What AAplc has done is actually downsized itself to an extent that it will never achieve the $13Bn/yr EBITDA runrate and thus become a MCap >$70Bn company.

    But what caused such deleterious change in strategy? Well , readers are referred to the S&P commodity index again. For the period June 2014 – Jan 2015, whereby it cratered from 660 to 391 , thus sending panic in the executive suits at AAplc. During CY15, the S&P GSCI decreased further to 280. In Feb 2016, AAplc where in full unwarranted crisis mode , despite the significant Liquidity of ±$15B , and announced portfolio restructuring and thus hold a garage fire sale of assets. This delayed some significant projects ramp-ups like Minas Rio & Grosvenor/Moranbah. It was unnecessary & its costs are still being felt as depicted by the production figures.

    CONCLUSIONS

    Fellow readers, has Mark Cutifani been a success as a Anglo CEO? It is preferable that you motivate your answer.

    I will provide my reasoned opinion in 7days!

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