Anglo 'cautious' on half-year dividend

David McKay | Tue, 13 Jul 2010 18:26

[miningmx.com] -- ANGLO American’s listed South African business units – Anglo Platinum and Kumba Iron Ore – are expected to provide the group with an earnings fillip when it reports half year results on July 30.

On the downside, however, a deterioration in near-term global prospects and net debt of over $10bn may motivate CEO Cynthia Carroll to be cautious regarding the resumption of Anglo’s dividend.

Analysts think Kumba Iron Ore will produce record earnings when it reports interim earnings, some eight days earlier than Anglo on July 22. Shares in the 66% owned iron ore producer have gained nearly 9% since the start of the month.

This is notwithstanding provisions in Kumba’s accounts for the first of royalties payable to the South African state which analysts said was expected to touch R500m in the first half of Kumba’s financial year.

Royalties on pretax earnings are now payable in terms of the Royalty Act promulgated, but not immediately implemented in the wake of the financial crisis, by the South African government in 2008 to compensate the state for use of exhaustible assets.

Kumba said on July 9 that headline share earnings would be between 1,900 to 2,055 cents, an increase of up to 90% year-on-year. “The increase in earnings is largely attributable to an increase in export iron ore prices and a 10% increase in export sales volumes in the period,” Kumba said in a statement.

The performance was also despite a strike by Transnet, the South African freight utility, which would have minimal effect on the company’s earnings. In fact, Kumba Iron Ore's export volumes are expected to be 10% higher at around 18.8 million tonnes compared to 17.1 million tonnes in the same period of the corresponding financial year.

Some 1.4 million tonnes of iron ore was sold to ArcelorMittal SA in the period at the historic level of 3% plus costs. This is well below the iron ore price Kumba would receive if it’s successful in having the long-standing sales agreement with ArcelorMittal SA, which fixes iron ore prices, adjusted to a higher, market related price for iron ore.

Anglo Platinum, meanwhile, said on on Tuesday that basic headline earnings would be up to 15% higher, while headline earnings would be bolstered by a one off benefit of having sold its 37% stake in the Western Bushveld joint venture to Wesizwe Platinum.

The key question at Anglo Platinum is whether it can maintain its cost improvements, but the downtime at the Polokwane smelter would reduce output to about 1 million ounces for the period against expectations some 1.2 million ounces of platinum would be produced.

“You do expect Anglo American to resume the dividend payments,” said Wayne McCurrie from RMB Asset Management. “But I don’t think it will be in this six month period,” he said. “As for the debt in Anglo, it’s manageable and the company has access to debt markets again.

I imagine shareholders would prefer to receive a dividend because they can do the asset allocation better than Anglo can

“I’d expect Anglos to make about R30 to R35/share in earnings over the whole year and perhaps pay a third of that out to shareholders. The debt won’t have too much of an effect,” he said.

Piet Viljoen of Re:CM, an asset management firm, said it didn’t matter whether Anglo American paid down its debt pile or paid a dividend from a value point of view.

“If it didn’t pay out a dividend, Anglo could buy other assets but it hasn’t been known for very good asset allocation in the past,” he said. “Anglo bought over the odds for the Minas-Rio iron ore asset and bought back its own shares at a very high average price,” he said.

“So if there’s any preference, I imagine shareholders would prefer to receive a dividend because they can do the asset allocation better than Anglo can,” he said.

The key issue may be Anglo’s debt figure. The favourable impact of Anglo Platinum’s rights issue has been offset by having to inject cash into the 45% held diamond company, De Beers.

Meanwhile the proceeds of having sold its remaining shares in Tarmac and coal exploration rights would only come into the second half of its financial year at the earliest.